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OSCM_Zara for IT Fashion_HBR Case Analysis_Group I


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GHBR Case Analysis on Zara case

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OSCM_Zara for IT Fashion_HBR Case Analysis_Group I

  1. 1. 9/22/2014 CFV Project - MAPI 1 Case Study Analysis Zara: IT for Fast Fashion Binus Business School, MM Executive Batch 20 Presented by Group I Alexander Christian Dina Sandri Fani Jenna Widyawati Ridwan Martawidjaja
  2. 2. Table of Contents 9/26/2014 2 Introductions About Zara Zara’s Issues Analysis Recommendations 1 2 3 4 5 Case Analysis – Barilla SpA
  3. 3. Table of Contents 9/26/2014 3 Introductions About Zara Zara’s Issues Analysis Recommendations 1 2 3 4 5 Case Analysis – Barilla SpA
  4. 4. Inditex Landmarks CFV Project - MAPI 9/22/2014 4 1963 Amancio Ortega Gaona, chairman and founder of Inditex, launches his business as a clothing manufacturer. 1975 Zara is founded with the opening of the first store on A Coruña (Spain) city center street 1976 The Zara fashion concept is well received by the public, allowing it to expand its network of stores to major Spanish cities 1985 Inditex founded as the head of the corporate Group 1986 Group manufacturing companies sell all of their output to Zara and lay the groundwork for a logistics system capable of addressing expected rapid growth 1988 1st Zara store outside Spain opens in December 1988 in Porto (Portugal) 1989-1990 The Group expands to the United States and France with the opening of stores in New York (1989) and Paris (1990) 1991 Launch of Pull&Bear. The Group acquires 65% of Massimo Dutti Group 1995 Inditex buys 100% of Massimo Dutti’s share capital 1998 Bershka launches, targeting a younger female market 1999 The acquisition of Stradivarius makes it the Group’s fifth concept
  5. 5. Inditex Landmarks CFV Project - MAPI 9/22/2014 5 2000 Inditex moves its headquarters into a new building in Arteixo (A Coruña, Spain). 2001 Launch of the Oysho lingerie brand. On 23 May 2001 Inditex goes public and is listed on the stock market 2003 The first Zara Home stores open. Inditex inaugurates its second Zara distribution centre, Plataforma Europa, in Zaragoza (Spain), supplementing the Arteixo logistics hub (A Coruña, Spain). 2004 Opens store number 2,000 in Hong Kong, bringing its presence to 50 countries in Europe, the Americas, Asia and Africa 2006 Opens store number 3,000 in Valencia (Spain), a Zara Home store in one of the city’s busiest shopping areas. 2007 Adds two news logistics platforms in Onzonilla (León) and Meco (Madrid), both in Spain. Inditex has eight logistics platforms in Spain. 2008 Launch of fashion accessories concept Uterqüe, the company’s eighth chain. Inditex opens the store number 4,000, this time in Tokyo. 2010 The Group reached the 5,000-store mark with the launch of a cutting-edge, eco-efficient Zara store in the heart of downtown Rome (Italy). In September, Zara began selling its products online and by year’s end the online store was available in 16 European countries. 2011 All the Inditex concepts have online stores.
  6. 6. About Inditex Inditex presents in 88 markets in all five continents, with upwards of 6,460 stores and 128,000 employees CFV Project - MAPI 9/22/2014 6
  7. 7. About Inditex Inditex’s presence in Europe CFV Project - MAPI 9/22/2014 7
  8. 8. About Inditex Inditex’s presence in America CFV Project - MAPI 9/22/2014 8
  9. 9. About Inditex Inditex’s presence in Asia CFV Project - MAPI 9/22/2014 9
  10. 10. CFV Project - MAPI 9/22/2014 10 About Inditex Manufacturing strategy
  11. 11. CFV Project - MAPI 9/22/2014 11 About Inditex Supply chain strategy
  12. 12. Inditex’s Business Structure CFV Project - MAPI 9/22/2014 12 Traditional model Inditex model Design Sourcing Store Customer Customer Store Sourcing Design  Opposite of traditional clothing cycles  Pull type production process  Quick response  Real-time sales information from its stores  Small batch quantities allow the retailer to see what items are working with shopper  A central distribution center in Arteixo, with strong IT systems developed by Inditex and third parties, supports its supply chain model  All items are shipped back to Spain where they are then shipped out to stores around the world
  13. 13. Inditex Retail Chains CFV Project - MAPI 9/22/2014 13  Founded in 1975  Continuous design based on customer desires, for women, men, & children  Acquired in 1995  Higher fashion for men and women  Founded in 1998  Trendy clothing for a younger market  Founded in 1981  Offering casual clothing at affordable prices  Acquired in 1999  Youthful urban fashion  Founded in 2001  Lingerie
  14. 14. Table of Contents 9/26/2014 14 Introductions About Zara Zara’s Issues Analysis Recommendations 1 2 3 4 5 Case Analysis – Barilla SpA
  15. 15. About Zara CFV Project - MAPI 9/22/2014 15  Opened its 1st store in 1975 in A Coruña (Spain) by Amancio Ortega  Operates in 87 markets with a network more than 1,900 stores located in major cities  Consists of more than 200 professionals and aimed to bring Zara’s design process closely linked to public  Introduce vertical integration of activities in order to be flexible and fast in adapting to the market  Require to constantly updated merchandise: new garments must be landed in stores twice weekly  Pays special attention to the design of its stores in order to deliver a superior customer experience
  16. 16. About Zara Vision and Mission CFV Project - MAPI 9/22/2014 16 Vision “Zara is committed to satisfying the desires of our customers. As a result, we pledge to continuously innovate our business to improve your experience. We promise to provide new designs made from quality materials that are affordable” Mission “Through Zara’s business model, we aim to contribute to the sustainable development of society and that of the environment with which we interacts”
  17. 17. About Zara Competitive Advantages CFV Project - MAPI 9/22/2014 17 Cost Leadership Fashionable (quality) at reasonable price “Cheaper price than Benetton and GAP, and still being fashionable” Fast Production Ability to design and get finish goods in stores within 4-5 weeks Very quick to get designers-influenced products into their stores Product Variation Ability of Zara to launch new trends, design, and variation of product Low level of inventory Efficient distribution system Product turnover is high
  18. 18. CFV Project - MAPI 9/22/2014 18 About Zara Perceptual Mapping against its competitors Perceived as a brand with a low price but with a high fashion taste!
  19. 19. CFV Project - MAPI 9/22/2014 19 S W T Strengths • Cost leadership strategy • Efficient distribution • Fast delivery of new products and trends Opportunities • Global market penetration • Online market • Distribution center in US and developing countries Threats • Local competitors • Global competitors • Zara based in Spain and has a huge number of stores in Europe will dent in revenues O Weaknesses • Centralized distribution system • Low marketing expenditure of 0.3% of its revenue • Only has one manufacturing and distribution center in the world About Zara SWOT Analysis
  20. 20. Zara’s Business Model Value Chain Model CFV Project - MAPI 9/22/2014 20 ORDERING Administration & Systems FULFILLMENT Procurement DESIGN MANUFACTURING DISTRIBUTION CENTERS STORES Business Support Units Support Activities Primary Activities Firm’s Value Chain Michael Porter’s Value Chain Model for Zara “Link customer demand to the manufacturing, and link manufacturing to distribution”
  21. 21. Zara’s Business Model Empowering the store managers and commercial teams CFV Project - MAPI 9/22/2014 21 Input Process Output Raw material Fabric Wool 1 Design 2 Extend & modify 3 Place production orders 4 Set prices Leather 1 Sketch 2 Approved sketch Commercial Team  Served as La Coruna’s main interface with Zara stores  Helping the design teams to keep abreast of fast-changing trends  Traveled extensively: mystery shopping on what resident wears; interviewing store managers to find out what kinds of clothes were selling  Communicate the findings to the design teams Store Product Manager
  22. 22. Zara’s Business Model Vertical Integration Model CFV Project - MAPI 9/22/2014 22 Design/Production/Logistics Store Customer  Full discretionary of commercial team, i.e. product managers  Product managers to set the garment prices  Invested heavily on stores  Store layout completely changed every 4-5 years  New layouts designed & tested before being rolled out  La Coruna traveled around the world to set up the new configuration  Short product life spans within customers’ closet  Impulsive buying: grab it as soon as they saw  Generate repeat customers: visit the store often as new styles showed up all the times
  23. 23. Zara’s Business Model Continuous design, production, and distribution CFV Project - MAPI 9/22/2014 23 Creative Departments: 200+ staffs Samples: prototypes made in-house & by suppliers Spreading: material for garments laid out in layers & marked Cutting: a machine cuts the fabric according to the patterns Sewing: cut fabric is shipped to workshops to be stitched Delivery: garments arrive in stores within 48 hours of ordering Shipping: from logistic centers to stores, road and air Finishing: garments are pressed, dressed, and quality checked Design, Product, and Market Cycle 1. Final design: 1 day 2. Manufacture: 3- 8 days 3. Transport: 1 day 4. Selling: 17-20 days
  24. 24. CFV Project - MAPI 9/22/2014 24 Zara’s Operating Model Three cyclical processes involved Order (twice a week) Fulfillment Design & Manufacturing Replenishment Initial Request  Predetermined quantities based on past selling data for those who missed the order submission deadline  Store manager to decide replenishment quantities by using canvassing model  Order made through PDA handheld that was linked to information systems at La Coruna  Personalized offers for each store (developed by commercial team)  Divided the offer into segments  Store staffs fill in the offer for their segment  Beam backs to the store manager  Store manager to review and send the completed form back to La Coruna
  25. 25. CFV Project - MAPI 9/22/2014 25 Zara’s Operating Model Three cyclical processes involved Order (twice a week) Fulfillment Design & Manufacturing Received order SKU ≤ Supply? Yes No Inventory to be divided to all stores Determine which stores should get the available inventory and which wouldn’t based on past performances  Commercial team to consult with product managers in determining future productions  Increase the production a.s.a.p. when demand > supply  Decrease replenishment request and stop placing new factory orders when supply > demand  Showed up at stores 1 or 2 days after order was placed  Truck delivery for stores in Western Europe from 2 Spanish DCs  Replenished from smaller local DCs for stores in Latin America  Air delivery from Spanish DCs for remote stores
  26. 26. Zara’s Operating Model Three cyclical processes involved CFV Project - MAPI 9/22/2014 26 1 Zara’s design team monitors fashion trends and store sales. Based on this they come up with 1,000 designs a month Design team They send these out for manufacturing around the world Manufacturing 3 2 Completed designs are shipped back to Spain The design team then flies or trucks out consignments for each of Zara’s stores based on local needs and trends. A store gets consignments twice a week Local store manager in each country tells the Zara HQ in Spain what the store needs and much 4 5 Retail Design & Manufacturing
  27. 27. Table of Contents 9/26/2014 27 Introductions About Zara Zara’s Issues Analysis Recommendations 1 2 3 4 5 Case Analysis – Barilla SpA
  28. 28. Zara and Information Technology Information systems at La Coruna, factories, stores, and DCs CFV Project - MAPI 9/22/2014 28  No CIO and no formal processes for setting an IT budget, including on deciding a specific technology investments and projects  Zara’s IT spending was below average of North American retailers, i.e. 0.5% vs. 2% of its revenue or amounted to €25 million  Little justification for IT efforts  Cost-benefit analysis conducted only for a proposed efforts  Prefer to build in-house application rather than buying commercially available software as operations were too unique and complex  IS Department consisted of 50 people; divided into 3 functional areas i.e. Store Solutions, Logistics Support, and Administrative Systems
  29. 29. Zara and Information Technology Information systems at La Coruna, factories, stores, and DCs CFV Project - MAPI 9/22/2014 29  Several information systems are used to prepare orders, distribute them over internets and collect them  Factories had simple apps which provided information about order and due dates  DC had largest automation with complete tracking of SKU’s  Stores used PDA’s which communicate to La Coruna via modems  PDA’s were upgraded constantly while POS terminals remained same for over decade  POS used DOS as operating system and its installation and maintenance was very simple  No real time feedback from stores to Zara’s HQ  Transmission required copying into floppy disc & then sending it using internet which happened at the end of the day  No dialogue between PDA and POS inside store or between two stores
  30. 30. CFV Project - MAPI 9/22/2014 30 Zara and Information Technology Current Status & Dilemma Current Status  Currently uses POS system based upon DOS which is very easy to use & working fine for them  Does all the basic ops of billing but does not provide any customer insights, real-time data or any advanced sales projections  Zara is getting bigger & bigger: operations are becoming more complex  Hardware vendor may modify peripherals for POS so they may not run on ancient OS such as DOS Dilemma  Shall they let go off DOS which is working great for them & migrate to modern OS such as Windows, Linux?  If they are not migrating to new OS then should they stock up on current POS terminals to protect them from sudden loss of support from vendor?  If they migrate to new OS, can they use this opportunity to build new capabilities in POS?  If they are building new POS, can they extend its capabilities so that it can have network across the stores & within the company?
  31. 31. Table of Contents 9/26/2014 31 Introductions About Zara Zara’s Issues Analysis Recommendations 1 2 3 4 5 Case Analysis – Barilla SpA
  32. 32. CFV Project - MAPI 9/22/2014 32 Zara and Information Technology DOS based POS Why DOS based POS work for Zara  DOS based POS is in alignment with Zara’s business philosophy  Majority of business concentrated in Europe especially in Spain  Zara prefers speed based decentralized decision making  Highly responsive vertically integrated supply chain reduces need for long range sales forecast  More dependant on market feedback from ‘commercials’ than from customer data insights  Believed in ‘manufacturing on fly’ rather than long range sales forecast  Low level of inventory in current scale operation: reducing need for smart inventory management  Current scope of operations makes ordering and fulfillment possible using DOS based POS
  33. 33. CFV Project - MAPI 9/22/2014 33 Zara and Information Technology IT Installation Easy installation & ease of operation  Use of DOS based POS is very user friendly, stable, and easy to maintain  Layman like store employee can switch on system & set up entire POS architecture  Complete software installation does the trick in the event of serious software malfunction  No need to separate maintenance crew for POS as employees can do it by themselves  Ease of customization on POS: Zara operated in various geographies & currencies which necessitates need of customization  Majority of complex operations such as sewing, dyeing were outsourced by Zara. Hence factories require simple apps rather than complicated apps due to its current scope of business
  34. 34. CFV Project - MAPI 9/22/2014 34 Zara and Information Technology Need for new system Why we need a new system  Zara is the only customer using DOS  DOS does not get support from Microsoft anymore: exposed to system malware  DOS cannot catch up with the evolved needs at stores  Hardware vendor might upgrade their machines which are not DOS-compatible  Shipments and sales were not recorded perfectly under the old system  Hardly to monitor the stocks; thus open the room for theft, damage, and other losses  Centralized data may help to expand in different countries  The expansion of Zara in Asian continent would require new system
  35. 35. CFV Project - MAPI 9/22/2014 35 Solving the problem Should the project to revenge the IS be fully or practically externalize? 18,000 hours Basic assumption for the IT investment Assuming that only 10 people are devoted to POS software  10 people are available to handle the project working 8 hours a day  Estimated project timeline is 7 months  Would take too much time to set up this project. However, notices that they have the skill to handle perfectly the project Assuming we outsource the project  Faster timeline but will be more costly  Have to integrate a training system of the staff to lower the outsourced fees  However, not sure if it match Zara’s IT policy as it always develops its own IT solution Proposal  Partially outsourced assisted by internal IT staffs  Faster timeline and lowering the professional fees
  36. 36. CFV Project - MAPI 9/22/2014 36 Solving the problem Which solution would you recommend and why The change of old system is unavoidable  DOS is an obsolete system as Microsoft doesn’t support the system anymore  POS terminal will not be compatible with the current POS software  PDAs used in all Zara stores and POS terminals are not connected with Zara’s HQ or with other stores  No in-store connection to link employees’ information like daily sales and the employees have to copy this information on a disk Windows as the preferred solutions  Noticed that UNIX provided the cheapest fees  But Windows is the leading player on the IT solutions and has been tested
  37. 37. CFV Project - MAPI 9/22/2014 37 Solving the problem The Calculation  CAGR of 22% calculated using past data of 1996-2002  Rest of the costs such as COGS, operating costs are calculated based upon past data  Migration to Windows based POS will cause net margin decreases to 9.98% but well above average net margin of 8.29%  Cost of system upgrade can be funded through cash & cash equivalent of 525 million Euros
  38. 38. CFV Project - MAPI 9/22/2014 38