Zara uses IT systems like POS and PDAs to gather real-time customer data on fashion trends. Designers use this data to quickly design and produce new clothing collections, with over 12,000 new items produced each year. Zara's supply chain is highly responsive, allowing new items to go from design to stores in just 15 days. This fast fashion model allows Zara to have minimal inventory and avoid markdowns. In contrast, competitors like Gap rely on long lead times and large production runs, leading to higher risks of unsold inventory.

1. Zara and IT-enabled
Innovation
MI703- Computer
Information Systems

2. The Defending Champ
 Who is the largest “pure play”
clothing retailer in the world?
 Problems at the Gap
• Previous CEO (Mickey Drexler, fired in
2003, went to turn around JCrew)
• Most recent CEO (fired in 2006)
 Maybe it’s not the CEO’s fault
• Looking to sell the company

3. Gap’s Chief Competitive Assets
 Brand
• Thoughts and feelings associated with a
product (best US brands?)
• How does Gap build brand?
 Coverage/ scale
 Size of operation gives buying power
 They have lots of retail channels to touch
customers.

4. Location, Location, Location
 Where does Gap make clothes?
• Offshore, in Asia
 Why?
• Cheaper labor
 The Problem?
• Most firms design a 'collection' for an
entire season.
• Place a huge order for stocking at the
start of the season.

5. “To everything there is a season.”
 What do you suppose are their lead-times from
design to manufacture to store: days, weeks, or
months?
• Months
• H&M is #2, it's 3-5 months from creation to delivery.
 How many new items Gap & H&M produce in a
season?
• 2,000-4,000
 How do they decide what to produce?
• Hire and monitor the “fashionistas.”
 What challenges does this raise for clothing
retailers?
• If you get it wrong…

6. The Challenger
 Inditex Group = Zara
 “The Most Dangerous Retailer in the
World"
 Products may seem different than
Gap
• Trendier, more glamorous.
• Same market segment - mass market
low end consumer fashions.
• Not mutually exclusive.

7. Praise for Zara
 Fashions more Banana
Republic – prices more Old
Navy.
 Goldman analyst as “Armani
at moderate prices”.
 Founder, Amancio Ortega, is
Spain's richest man & the
world's richest fashion
executive.

8. Anyone here ever shop
at Zara?
What do you think?

9. Success in
face of
competitors
 Since 2000, Index has
doubled stores to 2,240
(through ’04 end) with
sales of $76 billion.
 In contrast to Gap’s
woes, Inditex stock
price more than tripled
between '96 and '00.

11. Fast Fashion!
 La Coruna warehouse is 5 million square
feet = 90 football fields.
• Nine times the size of Amazon's warehouse
• These facilities move about 2.5 million items a
week.
• Connected to 14 Zara factories through tunnels
with ceiling-mounted rails.
 Cloth is ironed and products are packed on
hangers so they don't need ironing when
they arrive at stores
• Price tags are affixed
• Unpack them & they're ready to be sold

14. How’d they do it?
 Have you ever heard the old saying, “In
retail, ________ equals death?”
• Inventory.
 Why's this particularly painful in fashion?
• Inventory is perishable
• Fashion world is driven by customer demand.
 If you guess wrong?
• Mark down your inventory and take the loss

15. A radical thought
 Who knows best what you should have in your
stores?
• Customers
 If your bets are more accurate, what would this
mean for inventory?
• Fewer mark downs & write offs
 How might we get a better handle on what
customers want?
• Ask them
 Gap places big bets on fashion trends, Zara does
not.

16. How does Zara do this?
 Point of Sale Systems (POS)
• Fancy term for cash-register. Linked to HQ to
provide data
• Tracks how items in store are selling…what
they have that people want.
 Personal Digital Assistant (PDA)
• Handheld computer for manager.
• Inputs items people come looking for, what
customers want that they don’t have.

17. Competency & Complimentarity
 Sounds sophisticated. Does this cost a lot
of money?
• No, they spend 5-10 times less than rivals on
technology.
• There’s a lot of return-on-investment (ROI) in
Zara IT.
 Are these fancy technologies?
• No.
 Why does Zara succeed with IT?
• They use it in a smart way (IT Competency)
• It’s linked with core strategies (IT
complimentarity)

18. The Process
 What does Zara do with this Data?
• Real-time data from PDAs and POS are
whisked to 300+ designers who crank
out more than 12,000 fresh items each
year.
• Use it to decide on the fabric, cut, and
price points

20. Just-in-time (JIT) manufacturing
 Scheduling materials to arrive exactly when they are
needed in the production process.
• Keeps inventory to a minimum.
• For Zara, adds flexibility and speed.
 The ace behind this is one of the world's most responsive
supply chains (e.g. Dell, Wal-Mart).
• Some use supply chains for efficiency, Zara uses it for
innovation.
 Do they have a Versace working for Zara?
• No stars - mostly newcomers whose designs must take
advantage of cloth & materials Zara can provide.
 Why not?
• Zara does not predict, respond so quickly don’t have to…

21. In-house or Outsource?
 Does Zara outsource production?
 Why Not?
• Production is the critical success factor for Zara
• Fast Fashion.
 Vertical Integration
• Zara produces 60% of its merchandise in-house.
• Zara makes 40% of its own fabric and purchases most
of its dyes from its own subsidiary.
• Fabric is cut & dyed by robots in 23 highly automated
Spanish factories.
• 50% of fabric arrives undyed so the firm can react to
mid-season color changes.
 What about competitors?
• H&M has 900 suppliers and no factories.

22. The Value Chain (M. Porter)
•Infrastructure: general mgmt, planning, finance, IS
•HRM: recruiting, hiring, training, and development
•Tech. Development: R&D
•Procurement
Inbound Operations Outbound Marketing Service
logistics logistics & Sales
Supply
Chain

23. Fresh Fashion
 At Zara, most of the products you see in stores
didn't exist three weeks ago, not even as
sketches.
 What about the Madonna concert example?
 How often does the average Zara store accept
delivery of new products?
• Twice-a-week! It's like groceries!
• Items rarely remain on shelves for more than a week.
• You essentially walk into a new store each time you
visit.
 What advantage does this give Zara?
• Exclusivity! No single model is on the market for more
than four weeks.

24. All this translates into speed.
 Turn-around from idea to shelves is
15 days.
• H&M takes 3-5 months from creation to
delivery
• VF Corp (Lee, Wrangler) takes 9 months
• J . Jill takes up to a year
• Average = six months to design + three
months to manufacture.
• Zara is 18 times faster than competitors!

25. Advertising Costs
 What does Zara spend to advertise?
• 0.3% of sales
 What’s the industry average?
• 3-4% of sales
 For those keeping score, the average
in the industry is 10 to 12 times
more!
 Why no advertising?
• Their business model does it for them.

26. Z-days
 If your store looks entirely new twice-a-week,
how do customers react to this?
• They visit far more frequently
 How does this impact marketing costs?
• You don't need any.
• Zara customers visit 17 times a year (compared to 4 on
average in London)
• Highest sales per square foot (everywhere).
 Zara does almost no advertising.
• Customers are rabidly loyal
• Line up for 'Z' days when new shipments come in.

27. “But it costs more…”
 Gap follows cheap labor costs, Zara manufactures
where?
• In Europe.
 Who's got the higher manufacturing costs?
• Zara.
• The firm spends 15-20% more on manufacturing (less
of a gap than you'd expect).
 How can Zara manage to survive with higher
labor costs?
• Zara produces lots of products in small lots
• Gap produces a smaller # of product in bigger lots

28. Deal or No Deal…
 How does this influence Zara’s profitability?
• No slack inventory.
• What it makes it sells.
• It has low prices but almost never has an additional
sale, they rarely marks down items.
 They take fewer risks.
• Write-offs at Zara are a single-digit percentage. The
industry average is 17-20%.
 Zara says: "Being so quick allows us to reduce to
a minimum the risk of making a mistake - and we
do make mistakes - with our collections."

29. Gap’s mistakes
 Spring line '02 – trumpeted as a return to basics,
was a bust. Discounted within a month.
 And they did it again! You know what the
industry said of round 2? Here are some quotes:
• "The colors for women's wear are drab and for men,
what's with the racks and racks of track pants?"
• "The women's' printed shirts are wrong and the horrible-
looking men's graphic tees are really wrong“
 Heavy markdowns have sliced Gap margins 40%
in two years.

30. Why doesn't Gap copy Zara?
 They can't – they'd have to unwind
their model & fund new everything.
 Inimitability - “Making things is easy,
supply chaining is hard.”
 Couldn’t if they wanted to
• They have no credit
• Their debt is junk

31. Double-edged sword
 What vulnerabilities do you see in Zara’s
model?
• Where are almost all of its products
manufactured?
• Europe – specifically Spain.
 Financially vulnerable.
• The Euro – it’s a strong currency. It’s been
cleaning the dollar’s clock since its
introduction.
• Downside is that the cost differential with Asia
becomes even more pronounced.

32. Geographical vulnerabilities?
 What dangers can arise from being
centrally located in Spain?
• If there’s a natural disaster (think New
Orleans), terror attack, strike your
whole supply chain is shot.
• Pottery Barn Story.
 Geographic Location hurting global
expansion.
• Hard to be “fast” when have to travel
around the world.

33. Brainstorming?
 Where to from here?
• What business issues does this bring
up?
• Which of these concepts are most
important to your company?
• What other companies use IT to
innovate? Who are the leaders?
• What are other ways that IT can be
used to support innovation?