Information Systems:
A Manager’s Guide to Harnessing Technology
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Chapter 3
Zara: Fast Fashion from Savvy Systems
A Zara store in Manhattan: Controlling the supply chain is key, Jennifer S. Altman
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"you need to have five fingers touching
the factory and Hve touching the customer."
Translation: Control what happens
to your product until the customer
buys it. CEO Amancio Ortega
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Learning Objectives
•
Understand how Zara’s parent company, Inditex, leveraged a technologyenabled strategy to become the world’s largest fashion retailer
•
Contrast Zara’s approach with the conventional wisdom in fashion retail examining how the firm’s strategic use of information technology
influences design and product offerings, manufacturing, inventory,
logistics, marketing, and ultimately profitability
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Learning Objectives
•
Detail how Zara’s approach counteracts specific factors that Gap has
struggled with for over a decade
•
Identify the environmental threats that Zara is likely to face and consider
options available to the firm for addressing these threats
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Table 3.1 - Gap versus Inditex at a Glance
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Why Study Zara?
•
To understand and appreciate :
– The counterintuitive and successful strategy of Zara
– The technology, which has made all of this possible
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Gap: An Icon in Crisis
•
Micky Drexler, the iconic CEO, helped turn Gap’s button-down shirts and
khakis into America’s business casual uniform
•
Drexler’s team had spot-on tastes throughout the 1990s
•
When sales declined in the early 2000s, Drexler tried to revitalize the
brand by filling the stores with teenage apparels
•
This shift sent Gap’s mainstay customers to retailers that easily copied the
styles that Gap had made classic
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Gap: An Icon in Crisis
•
Gap’s same-store sales declined for twenty-nine months straight, profits
vanished
•
Paul Pressler, the new CEO shut down hundreds of stores, but it did not
help due to bad bets on colors and styles
•
The marketing model used by Gap to draw customers in via big-budget
television promotion had collapsed
•
In January 2007, Pressler resigned
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Contract Manufacturing: Lower Costs at What
Cost?
•
Conventional wisdom suggests that leveraging cheap contract
manufacturing in developing countries can keep the cost of goods low
– Contract manufacturing: Involves outsourcing production to third-party firms
• Firms that use contract manufacturers don’t own the plants or directly employ the
workers who produce the requested goods
•
Firms can lower prices and sell more product or maintain higher profit
margins
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Contract Manufacturing: Lower Costs at What
Cost?
•
The downside of contract manufacturing
– In order to have the low-cost bid, contract firms:
• Skimp on safety
• Ignore environmental concerns
• Employ child labor
• Engage in some ghastly practices
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Contract Manufacturing: Lower Costs at What
Cost?
•
Firms that fail to adequately ensure their products are made under
acceptable labor conditions risk a brand-damaging backlash that may:
– Turn off customers
– Repel new hires
– Leave current staff feeling betrayed
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Don’t Guess, Gather Data
•
To make sure that the stores carry the kinds of products customers want,
Zara managers ask the customers
•
Zara’s store managers are armed with personal digital assistants (PDAs)
that can be used to:
– Gather customer input
– Chat up with customers to gain feedback on what they’d like to see more of
•
Incentives for success—as much as 70 percent of salaries can come from
commissions
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Don’t Guess, Gather Data
•
Staff also checks for customer preferences by looking at unsold items
•
PDAs are linked to the store’s point-of-sale (POS) system
•
Point-of-sale (POS) system: A transaction process that captures customer
purchase information, showing how garments rank by sales
•
Managers can send updates that combine the hard data captured at the
cash register with insights (soft data) on what customers would like to see
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Don’t Guess, Gather Data
•
All of this valuable data allows the firm to plan styles and issue rebuy
orders based on feedback rather than hunches and guesswork
•
The goal is to improve the frequency and quality of decisions made by the
design and planning teams
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Design
•
Zara designs follow evidence of customer demand
•
Zara design staff consists of young and fresh designers from design school
•
Teams are regularly rotated to:
– Cross-pollinate experience
– Encourage innovation
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Manufacturing and Logistics
•
The average time for a Zara concept to go from idea to appearance in
store is fifteen days versus their rivals who receive new styles once or
twice a season
•
The firm is able to be so responsive through:
– A competitor-crushing combination of vertical integration and technologyorchestrated coordination of suppliers
– Just-in-time manufacturing
– Finely tuned logistics
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Manufacturing and Logistics
•
Vertical integration: When a single firm owns several layers in its value
chain
•
Value chain: The set of interdependent activities that bring a product or
service to market
•
Nearly 60 percent of Zara’s merchandise is produced in-house, with an eye
on leveraging technology in areas that:
– Speed up complex tasks
– Lower cycle time
– Reduce error
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Manufacturing and Logistics
•
Inventory optimization models ensure that each store is stocked with just
what it needs
•
Zara leverages contract manufacturers to produce staple items with
longer shelf lives, which account for only about one-eighth of dollar
volume
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Manufacturing and Logistics
•
Ceiling-mounted racks and customized sorting machines patterned on
equipment used by overnight parcel services and Toyota-designed
logistics, whisk items from factories to staging areas for each store
•
Clothes are ironed in advance and packed on hangers, with security and
price tags affixed
•
Trucks serve destinations that can be reached overnight, while chartered
cargo flights serve farther destinations within forty-eight hours
•
Zara is also a pioneer in going green
– Introduction of biodiesel for the firm’s trucking fleet
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Stores
•
Running out of bestsellers at Zara delivers several benefits:
– Allows the firm to cultivate the exclusivity of its offerings
– Encourage customers to buy right away and at full price
– Encourages customers to visit often
– Reduces the rate of failed product introductions
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Technology ≠ Systems. Just Ask Prada
•
Zara’s IT expenditure is less than one-fourth the fashion industry average
•
Zara excels by targeting technology investment at the points in its value
chain where it will have the most significant impact
•
Zara makes sure that every dollar spent on tech has a payoff
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Technology ≠ Systems. Just Ask Prada
•
The Prada example offers critical lessons for managers:
– Getting the right mix of the following five components is critical to executing a
flawless information system rollout:
• Hardware
• Software
• Data
• Procedures
• People
– Financial considerations should forecast the return on investment (ROI) of any
effort
– Designers need to thoroughly test the system before deployment
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Moving Forward
•
Zara’s value chain is difficult to copy, but it still has challenges to face
•
Limitations of Zara’s Spain-centric, just-in-time manufacturing model:
– If problems occur in northern Spain, Zara has no other fall back
– The firm is potentially more susceptible to financial vulnerabilities as the Euro
has strengthened relative to the dollar
– Rising transportation costs
•
Zara’s financial performance can also be impacted by broader economic
conditions
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Moving Forward
•
Zara’s value chain is difficult to copy; but it is not invulnerable, nor is
future dominance guaranteed
•
Zara’s management must
– Have an understanding of how information systems can enable winning
strategies
– Scan the state of the market and the state of the art in technology, looking for
new opportunities and remaining aware of impending threats
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Let numbers speak for themselves
•
•
•
•
•
•
The chain’s profitability is among the highest in the industry.
“the most innovative and devastating retailer in the world.”
High fashion but are comparatively inexpensive (average item price is $27)
Legions of fans eagerly await “Z-day,” the twice-weekly inventory delivery.
Managers are motivated because as much as 70 percent of salaries can come from
commissions.
Postponement strategy: Roughly half of the cloth arrives undyed so the firm can
respond as any midseason fashion shifts occur.
http://en.wikipedia.org/wiki/Postponement (e.g., Acer PC CPU, Beer labeling)
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•
•
•
Clothes are ironed in advance and packed on hangers, with security and
price tags affixed. Store staff regain as much as three hours in prime
selling time (per day?).
While running out of bestsellers might be seen as a disaster at most
retailers, at Zara the practice delivers several benefits.
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Attributes
Competitors
Zara
New Items Designed
2,000~4,000 (H&M,Gap)
30,000
From concepts to products
3~5 months (H&M), 6 months
(Gap) , 9 months (others)
15 days
Manufacturing
No factory (H&M)
60% produced in house
Batch size
Hugh batch size “everything is
the same” (Gap)
Small batches “You’ll never end
up looking like someone else.”
average markdown ratio
approximately 50%
15% (85% full price)
# of store visit per year
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Marketing /Revenue ratio
3.5%
0.3%
Failed product introductions 10%
1%
gross margins
56.8%
37.5%
IT Investment
Stores
¼ of the industry average
3,076 stores WW with 2,551 in US
(Gap)
3,900 stores across 70 countries.
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Technologies Deployed and Information
Gathered
•
•
•
•
•
•
personal digital assistants (PDAs)—handheld computing devices
PDAs are also linked to the store’s point-of-sale (POS) system
Looking for evidence in the piles of unsold items that customers tried on
but didn’t buy.
Zara designs follow evidence of customer demand.
Computer-controlled machine cutting tools
“The success of the model lies in being able to adapt what you’re offering
in the shortest time possible to what clients want. For Inditex, time is
the principal factor to take into account, more so than the costs of
production.”
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•
•
•
•
•
•
•
•
Close the communication loop: Customer  Store Manager/staff  market
specialists/designer  Production staff  Buyer  Subcontractor 
Warehouse managers/distributor
Separate design, sales, and procurement and production planning
staffs are dedicated to each clothing line (Men, women, and children).
Zara's cadre of 200 designers sits right in the midst of the production process
End-to-end control of supply chain.
Reduce the supply chain cycle time: Speed and responsiveness
Supply chain flexibility: Most garments come with five to six colors and five to
seven sizes, Zara's system has to deal with something in the realm of 300,000 new
stock-keeping units (SKUs), on average, every year.
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Bullwhip Effect in Supply Chain
Main information flow
Physical flow
ERP
Demand-Driven Supply Chain
SCM
SCM
CRM
Bullwhip effect -the tendency of supply chains (and all open-loop information systems)
to amplify small disturbances. Increasing Variability of Orders up the Supply Chain
The Bullwhip Effect in Supply Chains, Hau L. Lee, V. Padmanabhan and Seungjin Whang, Sloan Management Review, April 15, 1997
http://en.wikipedia.org/wiki/Zara_(clothing)
http://www.zara.com/#/en_GB/catalogue/woman/
http://www.zara-clothing.net/zara-basic/