Zara Case Study

MIS
HBS ZARA CASE STUDY

IT for fast fashion

- Axelle GRANGIER
- Moïse ELMAALEM
- Tiphaine GABREAU
- Sarah KHEMISS
- Samuel BERHMANI

12/2/2009

1 HBS ZARA CASE STUDY

SUMMARY

Table of Contents

Identify the general characteristics of the sector and the constraints ................................................... 2
Inditex business model ........................................................................................................................ 2
Sectorial constraints ............................................................................................................................ 3
Model the value chain and how IS supports it ........................................................................................ 5
How exposed the company to technology risk ....................................................................................... 8
Should the project to revenge the IS be fully or practically externalize ................................................. 9
Which solution would you recommend and why. ................................................................................ 10

BERHMANI ELMAALEM GABREAU GRANGIER KHEMISS


Identify the general characteristics of the sector and the constraints

Inditex business model
Zara is the most profitable brand of Inditex. It has opened his first store in 1975 in La Coruna in Spain.
Today, it has become the central headquarters for Zara. The group is present in all continents:
Europe, America, Asia and Africa.

Zara has developed a business model based on short deadlines, decrease quantities and a great
choice of style and clothes. The company succeeds to make moderate prices with a large choice of
new clothes every time.

The success of ZARA is based on two principals: follow the trend to be able to sell garments
at a moment where people want this kind of style, without using any advertisements as the
concurrence does. They don’t want to convince people to buy their clothes but give the public
what they desire at the moment. Secondly, the trust that had been given to employees allowed
the company to delegate. They decide what clothes should be in stores, the designed the
garments by pairs for a specific collection. Their role is to create clothes not to be sold for a long
time but only for a short period in appropriateness with the current trend.

The goal: of the firm is to convince the consumer to buy their clothes.

Their bid: they propose and deliver all fashion style at the moment and they don’t want to make
marketing for old or past fashion collections.

The infrastructure: Zara only works with stores. They don’t make merchandising in internet. The
stores are based in the strategic place of towns. The design and the organization of the stores are
changed every four years behind the indications and orders of La Coruna in order to be creative and
innovative all the time. So, in the beginning of 2003, they have 1158 stores in 45 countries. To
precise, their principal market is principally in France and in Spain.



Their strategy: What qualify the best Zara is reactive and creative. They adapt to their environment.
They mix secret and popular takings: The commercials don’t reveal what clothes will be produced.
It’s not an elite team who draws and makes the design of clothes: the collections are modified all the
time, divided in 3 sections “men”, “women”, and “children” and into different groups (“sports”).
There are 2 designers and 2 commercials and managers who imagine and realize the clothes. It is
adapted to the client desire: it is the concrete application of the “marketing d’étude”. The clothes
have to be worn about 10 times. For that, Zara don’t receive a lot of return of clothes from the
clients.

Organizations: Zara firms use a system of decentralization.

- Every unit or groups of work have his autonomy.
- Furthermore, employees have much more responsibilities than those other clothing chains.
They trust in the judgment of their employees and they take care of it.
- Commercials and products are much closed, very linked into the chain: in fact, commercials
travel all around the world to pick up new desires or tendencies of people; for example, they
look for what clothes Zara would sell if Zara made it.

Distribution and diffusion: Managers decide where set the clothes in the store. They set its in order
they want the clothes to be bought. At the difference with other firms, there are not the
headquarters who decide. The prices are decided for all stores.

So, Zara has demonstrated how her business model could be very successful. Her capabilities to focus
on one strategy wish is to change and be innovative all the time made of her one of the best
profitable clothing firm. In the future, they will have to continue to adapt their marketing and
strategic development using new information and communication technologies to make better and
better exploitation operations.

Sectorial constraints

Our study is about “the clothing industry sector”. We have to pick up the constraints of this sector.
First, we can notify that this sector is really influenced by the taste of customers. On top of that, their
tastes change all the time and very quickly, so it is difficult to forecast the new clothing trends. Their
feelings are very hard to predict and even more to influence. It is a superficial sector; a new fashion
trend can appear suddenly because of a small event. A trend can be popular and just a moment later
fade. It is difficult to be coherent with the taste of the customers. It is all the more difficult for
manufacturing than they don’t be in touch with the client. Therefore, we can also declare that there
is a lack of link between manufacturing and retailing.



Manufacturing have to forecast the demand to avoid risks in their inventory. Often, manufacturing
should have to reduce the production of a kind of clothing because it has a small demand, and they
can’t because they don’t know properly that there is no result. In fact, the production depends on
the area where clothing will be sold and the taste of customers. It is a problem to understand the
environment of this sector. Manufacturing have to understand, to meet quickly customers’ needs
and they have to adapt their production to the new trend properly.

Moreover, they handle a lot of stocks, so they have a lot of inventory risks.

There are a lot of constraints too for the retailing as regards their providers. They have to receive
quickly the merchandise, they have to reduce the transport costs and finally, they have to find the
best value for money concerning the material.

Eventually, international clothing companies have to deal with information and employees from all
over the world.



Model the value chain and how IS supports it

First, the value chain framework:

MIS

PRODUCTION MARKETING
OBJECTIVE
S

DESIGN

Indeed, we will see that the head office is the nervous center of the system. It is linked to the
creation studio, suppliers, undertraiting, shipment centers, and stores.
Every day, the information is transmitted at the head office (the turnover, the unsold, the
orders, etc...).
All this system allows the direction to have more visibility, and know what the good or bad
products are.



The value chain of ZARA:

I.S

Creation : Production :
designers and 11000 items a purchase materials
commercial teams year production order set Fulfillment
prices

Unsold
Twice a week

Suppliers

Store Store Store
Undertraiting
Store Store Store
s s
CUSTOMERS s

Commercials decide which clothes will be designed and produced. The team usually consists
of two designers and two managers, who purchase material, place production orders with
factories, and set prices.
Another group of commercials called store product managers sit in close proximity to the
product teams and serve as Zara main interface with Zara stores around the world. They can
initiate store to store transfers if some products are not popular in some areas. Zara
produces short life clothes.
Zara decided not to sell cloths over the internet, because the returns rates are too high.


Moreover, we can observe that Zara established 3 cyclical processes ordering, fulfillment,
and design and manufacturing.

Ordering:

Every major section of a Zara store (man, women, children) placed order (quantities,) to
headquarter twice a week with hard deadline. But there is no inventory in store computer so
managers have to check the stock.
Managers can see the newly available garments by consulting a handled computer that are
linked each night via dial up modem to IS.

Fulfillment:

Fulfillment or shipping clothes to stores involve other commercials. They determine which
store has to be supplied if there were not enough stock. They work with product manager to
determine future production for each SKU. They can ship items that stores didn’t order.

Design and manufacturing

Zara introduces approximately 11 000 new items each year much more than its competitors.
Zara manufacturing is vertically integrated. There is a network with specialized facilities that
quickly produces and delivers the required goods. Zara owns a group of factories in and
around La Coruna to do the capital intensive initial production steps dyeing and cutting
cloth. (small local workshop in Galicia and northern Portugal that guarantee quick
turnaround times). All finished garments are sent to Zara facility where they are ironed,
inspected, given a machine readable tag, and sent to a DC.



How exposed the company to technology risk

The project proposed by Salgado would be a revolution for the IS of Zara. It would change
everything and can be considered as a big step in Zara’s framework. Update the POS operating
system is expensive and irreversible. If the project mess it would black out the global sale system and
would cost bunch of dollars. That’s why an IS improvement has to but taken very seriously.

Zara has been keeping its POS OS (which is Microsoft DOS) because it is stable, easy to use
and cheap. The main risk is that their POS supplier drops them. Actually Zara is the only customer of
their supplier running on DOS. This would involve incapacity to open new stores – without POS it is
impossible. We can quickly calculate how much it would cost: The average store sales is about
€2million a year, with 80 new stores every year: €160m a year. Much more than the price needed to
put into this investment. To sum up the current IS system is a drawback to the future development.

The second main risk is that Zara has to keep up to date its information flow to foresee as
much as possible the future trends. With an effective IS they will be able to stay ahead the curve and
keep their leadership.



Should the project to revenge the IS be fully or practically externalize
According to the point of view of Salgado, Zara is getting bigger and bigger and its operating
system is getting more and more obsolete. Thus, it gives Zara to have a competitive advantage
because for a strategic perspective. Although Zara’s advantage over its competitors is not so much a
result of IT leverage, the sustainability of its competitive edge might be at risk due to a lack in IT
investment.

The current assumption for the IT investment states about 18,000 hours for this project. The
Zara’s staff devoted to IT contains about 50 people divided in several departments (store solutions,
logistic support, and administrative system). So we can suppose that only 10 people are devoted to
POS software and so 10 people are able to handle this project. With a brief calculation we can figure
that it would take too much time to set up this project with an internal team (about 7 months for a
10 people task team working 8 hours a day.) Furthermore nothing notices that they have the skill to
handle perfectly that project.

That is why we are prone to think that externalize would provide a more efficient solution,
completely handle by an outsourced professional team. It could be a little more expensive at short
and long term that is why if we choose this option we have to integrate a training system of our staff
to lower the outsourced fees.

An important point is that Zara has always developed its own IT solutions and if we make it
through subcontractors we are not sure that it would match with Zara values or way of doing. Zara
has been used to make it alone. Thus we think that some member of the IT staff could work with
subcontractors in order to lower these expenses and help them to create an It solution which fit in
Zara’s practices.



Which solution would you recommend and why.

The analysis of Zara’s activity reveals that its main strategy is the ability to give a quick
answer to target customers’ demand and its capacity to anticipate the customers’ trends. Zara is able
to identify new trends and to satisfy the demand of customers with its value chain system that is
really effective and its structure very organized. The system that they have worked with has been
easy to maintain and very effective. Thanks to that, the company decided to continue with this
system without changing anything.

Nevertheless Zara is now confronted with a problem: their POS system (Point Of Sale) runs
on DOS and Microsoft doesn’t support this system and also the POS terminal won’t be compatible
with the current POS software. But, change is inevitable because even if changing the system don’t
urgent, the company needs and it has to invest in IT infrastructures because MS Dos is an obsolete
technology and their POS terminal doesn’t guarantee that they will continue to supply the same
terminal without any changes in the present hardware.

PDAs (Personal Digital Assistants) which are used in all Zara stores and POS terminals are not
connected with Zara’s headquarters or with other stores, moreover there is no in-store connection to
link employees’ information like daily sales and the employees have to copy this information on a
disk. Changing the system should fill this weakness of intra- communication.

Finally the main needs of the company are an actualization of the IT and the improvement of
the in-store connection and the connection with the company’s headquarters. So, we can say that
change is unavoidable because such a company cannot continue to run with obsolete and
unconnected technologies.
So, it is clear that the improvement is necessary. With have to choose now between the
different options that are available with this solution. We have to forecast the different cost of each
solution (Windows, UNIX or Linux). At 5 years, globally costs of investing are reasonably close and not
significant. (Please check the exhibits). The main difference is the annual fees generated by this
investment. The cheapest is the UNIX’s solution.

WITH THIS SOLUTION

Assumptions for Zara upgrade decision
Store's number 1558
Avg computer per store 5
Number of new store a year 80
Hours worked a day 8
Cost per new store 34 230,00
Annual fees per store 365,00



UNIX Solution

Object Year 1 Year 2 Year 3 Year 4 Year 5
Global Store's 1558 1638 1798 1878 1958
number
Cost due to new 62 049 090,00 € 67 525 890,00 € 70 264 290,00 € 73 002 690,00 € 75 741 090,00 €
stores (investments)
(cumulus)
Annual fees 568 670,00 € 597 870,00 € 656 270,00 € 685 470,00 € 714 670,00 €
Fee cumulus 568 670,00 € 1 166 540,00 € 1 822 810,00 € 2 508 280,00 € 3 222 950,00 €
Revenue 4 000 000 000,00 4 120 000 000,00 4 243 600 000,00 4 370 908 000,00 4 502 035 240,00
€ € € € €
Revenue Growth 3% 3% 3% 3%
Investment/Revenu 1,55%
e



Exhibits
Exhibit 1

Operating System for POS terminals (cost per compuer/CPU)
Windows Value
One time license cost 140€
Annual maintenance fee 30€
Cost per store 850,00 €
Unix Value
Annual maintenance fee 25€
Linux Value
Service contract (10-150) 60€

Hardware (per store, avg 5 terminals needed per store) Value
POS Terminals 5000€
Wireless router 1 per store 180€
Wireless ethernet one per POS terminal 50€

Connectivity
HS Internet connection 240€
Hardware cost per store 5 670,00 €

Overall programming time required to
A. Port existing POS application to new OS 150000h
Expand POS aplication to include
B. Look up of same-store theorical inventory 3000h
C. Look up of other-store theorical inventory 1000h
D. Inventory Transfers 1000h
Cost per day of programming time 450€
Total A 8437500€
Total B 168750€
Total C 56250€
Total D 56250€
Total A + B + C + D 8 718 750,00 €
Time required per store to
Install new POS terminals with new POS application 16
Establish wireless network 8


Train Staff on new POS application 8
Cost per day of installation/ training time 2 000,00 €
Total cost per store 8 000,00 €

Exhibit 2

Cost for the Windows solution


Initial investment (without fees) 61 893 290,00

Maintenance fees (for the first year) 607 620,00

Global Store's number 1558 1638 1798 1878 1958
Cost due to new stores 61 893 290,00 € 67 354 090,00 € 70 084 490,00 € 72 814 890,00 € 75 545 290,00 €
(investments) max
(cumulus)
Annual fees 607 620,00 € 638 820,00 € 701 220,00 € 732 420,00 € 763 620,00 €
Fee cumulus 607 620,00 € 1 246 440,00 € 1 947 660,00 € 2 680 080,00 € 3 443 700,00 €
Revenue 4 000 000 4 120 000 4 243 600 4 370 908 4 502 035
000,00 € 000,00 € 000,00 € 000,00 € 240,00 €
Investment/Revenue 1,55%



Exhibit 3

Cost for the UNIX Solution solution


Maintenance fees 568 670,00

Global Store's 1558 1638 1798 1878 1958
number
Cost due to new 62 049 090,00 € 67 525 890,00 € 70 264 290,00 € 73 002 690,00 € 75 741 090,00 €
stores (investments)
max (cumulus)
Annual fees 568 670,00 € 597 870,00 € 656 270,00 € 685 470,00 € 714 670,00 €
Fee cumulus 568 670,00 € 1 166 540,00 € 1 822 810,00 € 2 508 280,00 € 3 222 950,00 €



Exhibit 4

Cost for the Linux solution.

Fees are 150 the first year, 80 the second, 40 the third, 20 the fourth and 10 the fifth. (So it is an
average of 60 over 5 years)


Maintenance fees 841 320,00

Global Store's number 1558 1638 1798 1878 1958
Cost due to new stores 60 802 690,00 € 66 151 490,00 € 68 825 890,00 € 71 500 290,00 € 74 174 690,00 €
(investments) max
(cumulus)
Annual fees 841 320,00 € 884 520,00 € 970 920,00 € 1 014 120,00 € 1 057 320,00 €
Fee cumulus 841 320,00 € 1 725 840,00 € 2 696 760,00 € 3 710 880,00 € 4 768 200,00 €
Revenue 4 000 000 4 120 000 4 243 600 4 370 908 4 502 035
000,00 € 000,00 € 000,00 € 000,00 € 240,00 €
Investment/Revenue 1,52%


Zara Case Study

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