OM 7083 ZARA CASE REPORT Group Members Samreen Pathan, Soumi Giri, Arvind Kurumbal Radhakrishnan, Vaishali Abhaysing Pawar, Apurwa Kale Zara’s Business Model ‘The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. This is the idea we still live by.’ Ortega and Castello shared two believes about the company. First, Zara needed to be able to respond very quickly to the demand of target customers who were young and fashion-conscious city dwellers. Although fashion-misses were common due to the fast emerging and fading trends, Zara wanted to be able to deliver such styles while they were still hot rather than relying on the persuasiveness of marketing for clothes not in trend anymore. Second belief being able to take advantage of the intelligence of store manager. Along with dealing with customers, employees, contractors and landlords, the store managers also decided which garments should be put on sale in the store. Difference vs other brands In sharp contrast to other chains, Zara’s collections were not designed by a small elite team, but a group of members called commercials who exercised a great deal of autonomy in deciding which clothes each store would be able to order. Zara also relied heavily on the intelligence of Store Managers, unlike other brands. Store Managers at Zara were given much more responsibility than those at other large clothing chains and the upper management trusted their decisions completely. Zara spent minimal amounts on the marketing of the brand. They placed ads only to promote their twice a year sale and a new store opening. Instead, they spend heavily on stores. The location, look and feel and the store layout is given great deal of importance. Zara did not have classics. They manufactured with an intent of their clothes to have fairly short span. This forced the customer to buy what they saw at the store immediately as it’d run out of stock soon, as well as return to the store sooner as there would be new styles in again. Scalability At the beginning of 2003 Inditex operated with 550 stores under Zara chain. The executives felt that ample room for growth existed within its current market of Italy and Western Europe. Italy had relatively low but extremely popular Zara stores and the Western European infrastructure could easily support the expansions for its markets. Demand and Supply Decisions On the demand side – Zara needs access to point of sale information from stores. An offer is prepared on a weekly basis by stores which contains the SKUs that need to be replenished and also a list of new SKUs that they want to sell. When ‘the offer’ doesn’t arrive from stores in timely fashion the head office in La Coruna fixes and sends only the amount required to replenish shelves based on point of sale demand data. On the supply side - Zara uses factories in and around La Coruna in Spain to do the capital intensive work of cutting and dyeing cloth. This is sent to be sewn within Europe and then sent to the distribution centres from where it reaches the stores. Cross referencing of supply and demand informs a lot of decisions that the company makes If demand is more than supply, the Zara prioritizes stores where they know the SKUs will sell more If demand is less than or equal to supply, then all ‘offers’ are met If demand is well below supply, then Zara slowly begins to phase those SKUs out These supply and demand decisions rely on theoretical inventory data. As per Zara’s leadership’s, accuracy of information regarding inventory is not paramount. So, there is room for errors caused by theft, damages etc. The company can still work with an accuracy of ~95% on inventory data. Network Expansion Decisions Although this is not discussed in detail in the report, we hypothesize that this decision is driven by: Availability of real estate – Zara prefers setting up stores in hubs or hotspots with large footfall Demand in area – Customer demographic that might end up shopping Zara, brand awareness in region etc. This might also inform advertising and marketing decisions Availability of supply chain network – If there are DCs existing in the proximity of the area, the cost for movement of goods would be lower as opposed to setting up a network from scratch Zara’s IT approach Zara’s information technology was targeted to achieve the goal of speed and making decentralized decision. Zara didn’t have a formal IT budget or chief information officer and no justification for different IT efforts or cost/benefit analyses for proposed effort. The IT department was 50 personnel strong. There are 2 important aspects of Zara’s operation that was taken into consideration for IT infrastructure: 1. Zara needed an efficient system to identify demands and requirement at each store to be able to replenish orders in short cycles 2. Zara need to implement faster order processing in distribution centre to speed up delivery time to fulfil demand requirement The IT department developed their own required software as they felt the commercially available software will not be able to meet the requirements of the company. They developed the applications to support accounting, ordering, fulfilment, and manufacturing. All the application were developed on DOS operating system and stores, DCs and operations had their own POS terminals to access and use the application. Stores recorded their sales and placed order through handheld PDA devices built on top of the application. There is no internal network for stores to communicate with each other regarding inventory or supply and all information captured throughout the day were backed up at the end of the business day using floppy disks and modem. This information was then leveraged by commercials to make quick decisions on supplies to be provided to stores and demand for different SKUs. Zara’s entire system was designed to fulfil only required demand and not have excess inventory in their fulfilment centres. Apart from the in store system Zara also deployed heavy automation in their distribution systems to have a quicker and more efficient system to fulfil faster store replenishment. Two major pillars of this IT infrastructure were stable existing systems and quick decision capability. Zara’s system was not concerned with having accurate demand forecast or internal store communication. Their goal was to be able to meet store demands in fastest possible time and ease of new store expansion with minimal IT support. The existing IT system can be installed easily through floppy disks with no IT support required for new shop setup. Thus they didn’t need a decentralized IT team to support store operations. The Zara approach is not applicable to all businesses as operations may look at other business considerations to make strategic decisions. Some such business decisions could be 1. Inventory levels to be maintained 2. Understand product popularity and customer behaviour 3. Understand price point impacts Such business decisions could not be made leveraging the existing Zara structure. Accurate demand forecast may be necessary for operation planning. Few of the biggest drawbacks with this approach is it forward compatibility with new devices, ease of use and availability of SKU information to stores. The entire application system was built on top of DOS system which was not supported by new devices and the software compatibility with new devices causes the uncertain situation of on further expansion with time. Also the method of inputting sales and inventory in the hand held PDA was a slow process and stores didn’t have visibility in SKU availability in other stores. This approach will not be applicable to systems where there needs to be constant communication between the different key player in the supply chain – inventory, distribution centres and stores. Also, new device compatibility with existing infrastructure will be an issue in the long term. There can be instances where stores may need to communicate with each other to understand available stock options to enable customer purchases or adopt data recording methods which will be less prone to human input errors. In all such instances Zara IT infrastructure would fail as it doesn’t have the flexibility to adopt new functionality. Salgado’s Dilemma Salgado is the IT head for Inditex and he I confused regarding upgrading the POS systems in the stores. He thinks it is necessary to upgrade the POS system to add additional functionalities, but he is also worried about the bugs in the new technologies and is afraid of not having expertise in the new POS systems. According to me, Salgado, should go ahead with the POS upgrade. The main reasons supporting this argument are – 1. The current POS system run on DOS, which is no more supported by Microsoft. So, any issues with the POS, would be dangerous to solve 2. It is always good to upgrade the systems with newer technologies, as it can help add functionalities into the system and make work easier Salgado can upgrade the systems, not all at a time, however by taking a ‘Divide and conquer’ approach. The POS systems in the stores can be divided, across regions, areas, cities, and they can be upgraded in batches. The functionalities an ideal POS should have are – 1. Invoicing: Sell, Buy, Rent and Repair - One of the main functions of a POS system is to record transactions that your store made. Recording sales transactions quickly in your system is very important when waiting lines are growing, so having a software that allows scanning and selling products without wasting time is beneficial for a retail business. 2. Inventory Management - When you receive your order, all you must do is scan or enter your items and everything will be saved in the software. Once you scan all your items, it will be much easier to know the quantity you have in your inventory for each article. This makes it easier to know how much you should have and how much you own. 3. Customer Orders and Supplier Orders – Sometimes your customers may ask you to put a product aside for them to buy later. The same happens when you no longer have stock of a certain item and a consumer is very interested in buying it. This is a customer order. As mentioned in the invoices, an order is made when you write down a customer’s contact information so you can inform them that the product, they are interested in is now available in the store 4. Integrated Supplier Purchases - A POS system can also record purchases sent to suppliers. Supplier purchases can be made to ensure the operations of the business and are considered necessary for good inventory management. Any purchases the shop makes can be directly recorded in the POS system for tracking purposes 5. Consistent and Customizable reports - A POS system allows you to have reports on various subjects such as accounting, sales, inventory, etc. It summarizes the company’s activities over a given period and makes it possible to know the company’s evolution Future strategy Zara can level up it’s already established brand by addressing some underlying risks and concerns: Zara should focus more on target customer’s rapid changing taste in fashion clothing. An open platform should be made available for every employee throughout the company to take their inputs. Build conceptualized and well-designed collection of products based on employee’s suggestions and trends analysis. Dedicated system to forecast the demands and production in each region to optimize their three cyclical processes – ordering, fulfilment, design and manufacturing. Improve their brand value by manufacturing durable products. This will also reduce the microplastic pollution, recycling efforts and overall impact on global environment. Invest more in marketing and advertising to identify growth opportunities. Enhance production and distribution network. Database infrastructure should be made robust to handle complexity of ever-increasing market like centralized and real-time database; this would inter-connect the stores. Store manager could get better customer insights and manage inventory in more efficient way. Migrate hardware to latest windows, Linux or UNIX operating systems which would make the application more flexible and reliable.
