Zara: IT for fast Fashion - Case Preparation

Inditex, the owner of Zara is the one of the largest chain retail store with revenues of € 3974 million and a net profit of € 438 million for the year 2002. Their biggest competitors are Gap, H&M, and Benetton.   Zara continuously maintains its mission to provide fast and affordable fashionable items. Unlike these companies, Zara does not predict trends rather its approach to design is more closely related to their customers. The maximum time from conception to distribution center is 3 weeks therefore the vertical integrated supply chain ensured constant introduction of new items with short lead times.

 

Key Problem: 

At Zara stores, the POS terminals used an outdated operating system DOS, that was no longer supported by Microsoft.  Zara has not upgraded its operating system since 10 years and remains to be the only customer still using DOS.  While this system is efficient in all ways and Zara is able to run their POS application, there is no guarantee that their vendors will change their hard drive & decide to upgrade its software.   There are over 550 Zara retail stores worldwide; however, they do not have a centralized network nor are they always connected to headquarters by a modem due to connectivity issues.  The PDAs used by all of the employees are not able to detect whether another store has an item in inventory; this causes employees to become less efficient because instead of having access to look up in their system to see if a store has a particular SKU item, the employee has to call the store to find out if they have a specific item. Zara’s inventory system works on “estimation” not 100% accuracy, which leads to incorrect inventory amounts and have an impact on keeping equilibrium between supply and demand of their products. Values between the systems were incorrect & Zara’s headquarters in La Coruna, have to wait until the end of the business day to find out the total sales for the day.

 

The scope of the problem involves how the 550 Zara stores be moved from an archaic operating system to a new operating system that involves a lot of money, essentially creating a need for an IT division to keep up with constant monitoring, upgrading and training of sales personnel. Though it would be beneficial to the distribution centers who would now have access to the store’s inventory. Therefore the initial investment of money spent on making this change would affect Inditex by incurring these new costs as an advantage in future.

Situation Assessment:

 

Zara’s process has been working fine for all these years and the company is growing at a rapid pace, adding 24 stores from 2001 – 2002 in various different countries. This expansion and growth would not stop Inditex in the coming years and to continue using an archaic system with no vendor support in the future would mean a risk of having more problems later when the company has more stores coming up across the globe.

The decision criteria for Zara should be adding functionality in the business processes, networking capability, sharing information between stores as smoothly as possible, and making the company run more efficiently with ordering and restock the items. It is not necessarily in relation to the cost of the changing to a new operating system in 2003, but what would be the difference in cost if they are stuck by their outdated IT system in the future. The company will need to evaluate where they see the most risk and combine that with the cost of an upgrade.

Alternative Courses of Action & Evaluation of Alternatives:

Zara has two main alternatives – whether to keep their existing DOS operating system for their POS terminals or to replace it with a new, supported operating system i.e. Microsoft, UNIX or Linux.

§  Alternative 1:

By continuing with the existing DOS on their POS terminals and not making any changes, ZARA will be able to eliminate the risks of the IT failure during implementation and changing the IT infrastructure of a company & there will be no need to create an IT department to handle the upgrades. It will save money for not having to replace the operating system in every store & also the training cost for the employees on the new software and functionalities. It will not put the company at risk in regard to the robust and scalable infrastructure that would have to be built. It will allow an easier process of store openings by just uploading two floppy disks into the terminals and being ready to start the store.

Evaluation: While this would cost the company nothing currently, this runs a very high risk of having problems in the future that will need to be taken into consideration. If Zara’s terminal vendor were to make changes to the terminal that would prohibit the use of DOS going forward, this could delay Zara from opening any new stores itself. If the Inditex kept continuing the current expansion, averaging one new store every two weeks, this could end up costing Zara millions of dollars in lost sales in the future due to a temporary or long term halt in its business process.

§  Alternative 2:

By upgrading and adding functionality, Zara will gain access by connecting to the stores across the globe to arrive at the current inventory levels and not having to manually call each store which will make the transmission of current data to the headquarter and the distribution centers, specifically if needing to order an item that is running low in the store. It will eliminate the need to use a PDA, which is time consuming and inconvenient due to its small screens. By having a wireless network, managers would no longer have to rely on floppy disks to compute the total sales from the registers and then transmit. If all the stores were permanently connected to the Internet, every location would know the theoretical inventory of all its SKUs.

 

Evaluation: While choosing a new operating system, the Company will need to evaluate three operating systems - Microsoft, Linux and Unix mainly on cost. These three options will be able to provide the Company with an updated, vendor supported operating system that they can use for all retail stores in the future. They can have networking capabilities, the ability to better monitor inventory and continue to be used for point of sale transactions. The main difference will lie in the upfront and annual costs for all three.


Zara does not have any cost problems to overcome as per the financial statements and does not use cost-benefit analysis for justifying IT decisions, however their decision criteria should be to evaluate the cost of each of the three providers for a new operating system; running that analysis will give management an idea of the costs in front of them at the present time. They will also need to be very realistic about the probability that terminals will not be able to use DOS in the future.

Recommendation:

The logical and quality recommendation is to make a switch from the outdated DOS on the POS terminals to a more stable operating system that is current with technology.  As Zara grew at a rapid pace, it should not only focus on what is working currently across the stores, but should also be thinking from the future perspective of having an obsolete system which is not supported by Microsoft itself & if they decide to upgrade the software leaving them in a dilemma that will halt the operations of the stores.  The current PDAs which look up SKUs are accurate; however, it would be more efficient if all of the company’s stores were on the same network.  Zara is a company in which their employees are very autonomous; managers decide which clothes to order and decide which clothing goes on sale.  There are very tight deadlines in the Operations department.  When supply does not meet demand it is individuals that choose which stores receive the items.  I believe that there would be more accurate accounts for inventory if Zara invested in a new operating system that supported the newer POS application software.  Reports would be run more often to create optimal plans to begin production, stores would be able to check up SKUs from other stores, as well as have a faster system with more functionality.  There are too many potential problems that could come up in the future by not updating the system, our company can be running fine on today’s POS terminal, but we are living in a fast paced world where technologies change frequently.  Store managers will learn how to use the new system, and if they run into any problems that is Zara has an IT team that includes experts in Store Solutions, Logistical Support, and Administrative systems.  It will be a wise decision to keep Zara’s IT infrastructure current with the technology, so that the company grows even more and continues to be Inditex’s largest chain store. 

Presentation

If I were presenting, I would sum up the case by stating how soon Zara is considering the benefits and disadvantages of upgrading Zara’s POS system from DOS to a Windows, Unix, or Linux based. There are many changes (both positive and negative) for making the change and continuing with the current system.

The key visuals I would include in the powerpoint slides will be giving a cost analysis of upgrading to Windowa/UNIX/Linux platform with regard to fulfilling orders and increasing customer convenience functionality. I would also include some screenshots of how the new system would look like and give a demonstration by running a test with few stores after having a discussion with the store managers if that is what they would like their IT infrastructure to work in future.

I would “sell” the recommendation by keeping the focus on Zara being a growing company and showing that their DOS system is working, albeit is outdated. Yet, I would still be just as unbiased in explaining the benefits of upgrading to a newer system.

The other delivery considerations to keep in mind are to always remain unbiased, but to have the understanding that a decision is needed and needed at the earliest. Just like in the clothing industry, styles come and go in a matter of weeks and Zara has to know how important it is to stay ahead of competition, which could cause them to upgrade their OS in the future.