Zara's IT Powers Fast Fashion

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

Table of Contents
9/26/2014
2
Introductions
About Zara
Zara’s Issues
Analysis
Recommendations
1
2
3
4
5
Case Analysis – Barilla SpA

Table of Contents
9/26/2014
3
Introductions
About Zara
Zara’s Issues
Analysis
Recommendations
1
2
3
4
5

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

Inditex Landmarks
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.

About Inditex
Inditex presents in 88 markets in all five continents, with upwards of 6,460 stores and
128,000 employees
6

About Inditex
Inditex’s presence in Europe
7

About Inditex
Inditex’s presence in America
8

About Inditex
Inditex’s presence in Asia
9

10
About Inditex
Manufacturing strategy

11
About Inditex
Supply chain strategy

Inditex’s Business Structure
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

Inditex Retail Chains
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

Table of Contents
9/26/2014
14
Introductions
About Zara
Zara’s Issues
Analysis
Recommendations
1
2
3
4
5

About Zara
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

About Zara
Vision and Mission
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”

About Zara
Competitive Advantages
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
About Zara
Perceptual Mapping against its competitors
Perceived as a brand with a low price but with a high fashion taste!

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

Zara’s Business Model
Value Chain Model
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”

Empowering the store managers and commercial teams
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

Vertical Integration Model
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

Continuous design, production, and distribution
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
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
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
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

Table of Contents
9/26/2014
27
Introductions
About Zara
Zara’s Issues
Analysis
Recommendations
1
2
3
4
5

Zara and Information Technology
Information systems at La Coruna, factories, stores, and DCs
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

Information systems at La Coruna, factories, stores, and DCs
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
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?

Table of Contents
9/26/2014
31
Introductions
About Zara
Zara’s Issues
Analysis
Recommendations
1
2
3
4
5

32
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
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
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
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
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
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

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