Zara Business Case Outline

Running head: ZARA BUSINESS CASE

Zara Business Case Outline Presented by Diimpu Nikhel Myneni Wilmington University Due Date: 09/21/2015

Zara Business Case Table of contents 1. Executive Summary………………………………………………………………………2 2. Current Environment……………………………………………………………………...3 A. Organisation Mission & Statement ……………………………………………..3 B. Current Organisation…………………………………………………………….3 C. Current Business Environment…………………………………………………..3 D. Organizational Technological Environment……………………………………..3 3. Solution…………………………………………………………………………………...4 A. Recommended Solution………………………………………………………….4 B. Scope of project/solution and assumptions………………………………………4 C. Constraints………………………………………………………………………..7 4. Data Collection and Analysis……………………………………………………………...7 A. Methodology 1……………………………………………………………………7 B. Methodology 2……………………………………………………………………8 5.

SWOT Analysis…………………………………………………………………………...8

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Feasibility Studies ………………………………………………………………………...9

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High Level Project Schedule ……………………………………………………………..10 A. Schedule Task…………………………………………………………………….10 B. Gantt Chart………………………………………………………………………..10

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Risk Management………………………………………………………………………….11

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References………………………………………………………………………………….12

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Zara Business Case 1. Executive Summary

This case paper presents the business analysis of Zara, the leading and the profitable brand of Inditex. The case paper’s objective is to discuss whether to update the current DOS/IT infrastructure and evaluate the effects of the upgrade. It presents the IS implementation opportunities and evaluating the effectiveness of the implementation. It concludes by providing recommendations for updating the current OS along with its advantages. The approach to analysis includes looking into the current supply chain processes and exploring the IT capabilities within Zara and proposing an Information Systems plan to enhance the process efficiency within Zara. The analysis reveals a significant but limited use of IT infrastructure in Zara to support several of its key business functions. It also exposes the need to upgrade the current IT infrastructure for sustaining the competitive advantage. The report reveals that though the current IT infrastructure has supported several of Zara’s key business functions but as the company continues to grow there would be a significant pressure on its IT infrastructure to provide sustained benefits in the long term. The recommended solutions include:

 Implementing transaction processing systems and management information systems to facilitate analysis and decision making process.  Use of centralized architecture for better coordination and cooperation amongst business functions.  Leveraging use of intranet and extranet within the organization.  Initiating a small pilot B2C e-commerce project.

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Zara Business Case 2. Current Environment A. Organization Mission & Vision Through Zara’s business model, we aim to contribute to the sustainable development of society and that of the environment with which we interact. All Zara products, including materials of animal origin, comply with the applicable Inditex animal welfare policy. This policy requires the products to come from animals treated in an ethical and responsible manner at all times. Zara, being a member of the Fur Free Alliance under the Inditex group, does not sell products containing fur, thus following the principles of the Fur Free Program.

B. Current Organization Zara is one of the largest international fashion brands of Inditex. The company first opened in La Coruna in 1975, still lives by the simple idea of Amancio Ortega to link customer demand to manufacturing, and link manufacturing to distribution. The customer is at the heart of the business model. In 1985, Inditex became the holding company atop Zara and other retail chains, and Jose Maria Castellano Rios joined the company.

C. Current Business Environment Inditex operates 1,558 stores in 45 countries out of which 550 stores are a part of Zara chain. Zara generates a major portion of Inditex’s sales accounting for 73.3%.Zara offers a great choice of new style clothes for Men, Women, and Children along with moderate prices every time. The women clothing account for 60% of Zara’s revenue.

D. Organizational Technological Environment Zara has developed the business model to sell the garments by following trends and styles, with virtually no advertising and trust the decision of a group of employees called as “commercials” on what clothes should be in stores. Zara’s approach to information technology is consistent with its core business model (McAfee et al., 2007). The website serves only as display window and Zara does not use the Internet to make sales. Zara’s business model uses P-O-S terminals, which run on DOS operating system not supported by Microsoft. It also uses the PDA’s for ordering and for tasks such as handling garment returns to DCs and transmitting information from headquarters to all stores. 3

Zara Business Case 3. Solution A. Recommended Solution Implementing transaction processing systems and management information systems to facilitate analysis and decision making process. Use of centralized architecture for better coordination and cooperation amongst business functions. Leveraging use of intranet and extranet within the organization. Initiating a small pilot B2C e-commerce project. Updating the required OS Software to improve the processing of the products in a quicker and accurate fashion. B. Scope of the project/Solution and Assumptions Zara’s business model uses P-O-S terminals, which run on DOS operating system not supported by Microsoft. Zara also uses the PDA’s for ordering and for tasks such as handling garment returns to DCs and transmitting information from headquarters to all stores. Looking at the table it is clear that Zara can enhance its primary activities by implementing IT in its system. Currently, Zara uses the outdated operating system, and so the operations such as ordering, fulfillment, design and manufacturing, and the in store operations are not that efficient. The PDA cause redundancy and POS terminals make it difficult to check in store inventories, check inventories in other stores, and share information. The store managers would have to call to check for available SKUs, which is a time consuming process.

The present system followed by Zara has been very effective, and so the company has continued using it without any changes so far. Although there is no immediate urgent need to change the

P-O-S, the question still remains is whether to invest in an obsolete technology.

Hence, the change is unavoidable. The proper implementation of IT and IS can provide great opportunity for Zara to improve its value chain operations. It finally analyses the current IS/IT practices followed by Zara and makes recommendations on furthering the use of IS/IT to sustain the competitive advantage.

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Zara Business Case

Primary

Already Has

Problem/Needs

Activity Ordering

Decision Making/ Level

Manual checking of inventories for ordering Handheld computers (PDAs)

Problems: The screen of the PDAs is small. Lack of in store computers to check inventories and sales. Also cannot match the exact inventory. Cannot look at inventories in other stores.

Store Managers

Needs: Instore computers to check inventories Fulfilment

Commercials cannot match the exact supply and demand

Problems: The commercials ship items not ordered by the store. Lack of in store computers makes it difficult to check which store needs the items.

Commercials

Needs: To make use of IT Design

Commercials decided on the design

Problems: Commercials within the design teams make a guess of the design and communicate it with factories. Commercials surveyed the market by talking to people.

Commercials within design teams.

Needs: Use of IT will help track sales data, and ease the communication with the store managers. Manufacturing

Disctribution centers

Zara has vertically integrated manufacturing operations, which enables constant introduction of new items with short lead times. Zara has large computer controlled equipment to cut cloth into patterns. Has internally developed simple applications to plan production.

Problems: Simple applications used do not have sophisticated mathematics to generate optimal plans and schedules. Plans and schedules are almost communicated manually instead of using IT. Internally developed software applications are not compatible with the outside applications.

DC relies heavily on automation and computerization. IS tracks each SKUs. DC’s use internally developed applications to control the DC’s

Problems: The Internally developed software may not be compatible with the vendors.

FactoryManagers. Commercials

Needs: Use of IT for easy communication of plans and schedules. Use of universal compatible software.

DC Managers

Needs: Provide compatible software

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Zara Business Case automation often in collaboration with the vendors of conveyor equipment. Stores

Supprot Activity

Uses PDAs and POS systems. Used the DOS operating system. No IT support is required to open new stores. Use floppy discs to transfer information. The store managers manually check the inventories.

Problems: Stores did not have computers beyond the PDA and POS terminals. PDAs and POS could not share information within a store and other stores to check for available SKUs. The store personnel needed to call to check for SKUs .POS terminals used the outdated DOS operating system. No in store networking available.

Already Has

Problem/Needs

Store Managers

Needs: In store networking should be available.

Decision Making/ Level

Administration & Administration: Uses standard commercial Systems applications for office productivity IT: IS department responsible for the internal development of applications. The IS department have three groups: Store Solutions, Logistics Support, and Administrative Systems. Human Resources: Training and development

Problems: Internally developed applications by the IT department may not be suitable for use. Lack of IT use. Needs: Vendor compatible software. IT use can enhance efficiency

Supply Chain Management. There are fewer inventories in the entire supply chain.

Problems: Lack of computers in stores, makes it difficult to match the exact inventory.

Business Support Has support areas for Expansion, Real Estate, Areas International, Logistics, Raw material, Manufacturing Plants

Problems: Communication is difficult, Time consuming. Offices need to be near the location for communication Needs: Use of IT for easy communication Enhanced efficiency, Use of IT can make centralized operations possible.

Procurement

Administration: Senior Level Managers IT: Senior Level Managers Middle Level Managers Human Resource: Senior Level Managers

All Levels of Management DC Managers

Needs: In store computers Development Officers Middle Level Managers Senior Level Managers 6

Zara Business Case C. Constraints Zara does not have a chief information officer or any formal process for setting an IT budget. Castellano estimated Inditex’s IT budget for 2009 was 1 % of the revenue, as compared to the 4% of the revenue of other North American retailers (McAfee et al., 2007). As there is no formal justification of IT efforts, there is also not any cost/benefit analysis. However, to maintain business competitiveness is the most important factor to consider when making any decision regarding the upgrade of IS.

Zara uses the P-O-S terminals that operate on the outdated DOS software, installation of new OS such as Linux, Windows, or UNIX will enable Zara to develop its capabilities. According to McAfee et al., the following costs can be identified in upgrading the current OS. By comparing the cost of OS for POS terminals, we find that Linux does not have any one time license cost, whereas, Windows has a one-time license cost of $370 and Zara Case Paper Analysis 14 UNIX has a one-time license cost of $520. Thus, Linux offers cheapest implementation costs for Zara. However, Linux has higher ongoing costs, such as service contract cost, ranging from $170 - $470 as the Linux service contract depends highly on IT staff’s knowledge in Linux programming and maintenance. As Zara will install the new OS on large number of computers, it needs to consider the costs of each OS. To upgrade the system Zara will also have to install new hardware and replace the old POS terminals. The cost of POS terminals is $8000, which will also require installation of new cables, routers etc. The Wireless routers and Ethernet cost, staff training cost, software installation and maintenance cost, and the per store connectivity cost of $760 etc. will also add to the upgrade costs. Apparently, this seems to be an immediate expense, but the cost will depreciate over the years. 4. Data Collection and Analysis

A. Methodology 1 On the observation of installing new system which will enable Zara improve the efficiency, this will directly influence Zara’s revenue. With the smooth communication among the stores as well as the headquarters, Zara can better predict the future needs of material, and save cost by hedging them at a low cost. The system will also enable Zara to make clothes prototypes at a quicker rate and get a faster response from the customers. Therefore, there will be more sales, 7

Zara Business Case less cost, more revenue, and more profit. For example, the system upgrade will provide better efficiency and networking between the stores and thus, reduce the operational costs and the number of per store employees. However, no specific numerical data is available to make the complete evaluation. 75% increase in the working atmosphere and increase in the sales after installing the new software which has been for other retail fashion organizations has been proved.

B. Methodology 2 Zara has always treated IT as a cost center rather than enabler. This explains the lack of CIO and CTO. This mentality can crush ambitious projects in the company that lacks the management expertise and experience of a senior IT official. When interviewed about hiring new employees at the higher level management with in the IT sector a 90% of the population has agreed to it as it is very essential to have someone to be responsible to get more clients and proceed accordingly.

5. SWOT Analysis

SWOT is an analysis tool that gives you a way to see how our existing or start-up fashion brand stands up against the competition. In a larger sense, SWOT will help you understand the fashion marketplace and your brand's place within it. Review of internal organizations •

Strengths Our brand and reputation in our markets is strong. We are recognized as being professional, reliable and quality-driven. We have excellent employees who are well trained, customer oriented and efficient. We have a relatively flat which allows us to make quick decisions and be adaptable to changing market conditions. We work on a continuous improvement operating model

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Weaknesses We are not the low-cost or low-price supplier in the market. Action: We need to continuously improve our productivity and efficiency to reduce cost.

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Zara Business Case We are committing to a Lean process that is enterprise-wide and that will help us improve our efficiencies. We are at risk if we lose one or more of our top 5 accounts. Action: We need to build new business, new markets and new services to mitigate that risk. We also need to ensure satisfied existing accounts and continue to build strong relationships with our customers.

Review of external environment •

Opportunities Technology changes that drive new products and/or services expansion; look for low cost and high margin opportunities and ones that leverage our capabilities. Partnerships or alliances with other businesses; growing the business by partnering on specific work. Growth potential of two new customers, opportunity for growth in under-represented geographic markets. Cost of marketing is less in this digital age: capitalize on the lowered cost with a stronger program.

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Threats Industry strength or weakness: negative impact of technology/digital age and the adjustment needed within the industry. Impact of global economy on local business. Foreign currency exchange rate variation: for example, the US/Canadian dollar exchange rate fluctuations can impact our business.

Focus your strategic plan on capitalizing on the strengths and opportunities; managing the weaknesses; and dealing with the threats.

6. Feasibility Studies The new OS system will offer managers with tools that will provide them with more timely information. They will not have to match the sales record at the end of the day, but rather the data will be automatically updated not only at store levels but also at the headquarters. The managers will be able to locate the inventory in the supply chain easily and ask for a particular SKU immediately rather than calling and checking which store has one. The managers will be able to 9

Zara Business Case manage inventory on an ongoing basis on the frequency of the shipment. All the stores will share the inventory information, which will enhance the inventory management. The communication between the stores will be faster. The employees will be less stressful due to the reduced workload. The time spent by the managers in looking and matching inventory and making calls can now be utilized in more productive decision-making, planning and further improve organizational earnings. In addition, the store managers could learn about trends and development at each store, which is currently not possible in this decentralized group. All of this will lead to increased employee satisfaction, higher efficiency, and enhanced goodwill. Another benefit the new system can provide is the efficiency in matching the demand and supply at the order entry process rather than using the old batch process. It will enhance the ordering process. The use of PDAs for ordering will prove useless just to process orders. This will lower operational cost as well as increase productivity. By the use of this modern internet system, stores will be able to transmit information related to inventory and orders easily to the headquarters or to the other stores. This will enable to match the supply and demand more accurately and reduce the inventory risk.

7. High Level Project Schedule

A. Schedule Table Task Installing OS Testing OS Interviews process Implementing Process Risk Assesment Prosess Planning Process Over All Process

Duration 2 weeks 6months 2months 8 months 2months 2months 12months

Start date 5/10/2015 5/10/2015 6/1/2015 5/10/2015 3/10/2015 3/10/2015 3/10/2015

Finish Date 5/24/2015 11/10/2015 8/1/2015 1/102016 5/9/2015 5/9/2015 3/10/2016

B. Gantt Chart A Gantt chart is an excellent tool in the hands of project managers who wish to visualize, schedule, and track scheduled and actual progress of projects. Its graphical nature allows executives and non-managers to readily understand project flow, without a requiring a complete tutorial in project management.

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Zara Business Case

8. Risk Management

Zara extensively uses its IT infrastructure to ensure a smooth flow of information between its business functions. There are certain grave security threats that Zara faces with respect to its IS/IT infrastructure. These can be divided into three categories (Jessup & Valacich 2008):  Accidents and Natural Disasters: Natural disasters like earthquakes, hurricanes and accidents like physical damage to IT infrastructure, power outages etc can severely compromise the information systems within an organization. Backup facilities for the current infrastructure would obviate any severe impact on the business operations.  Unauthorized user access: Access of company’s sensitive information to outsiders, employees or competitors would have serious repercussions on Zara’s business. Intrusion of viruses could cause a major breakdown of the company’s information system. An installation of physical and digital access controls and the constant upgradation of the antivirus software would keep the company’s information system secure.

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Zara Business Case  Link to Outside Business Contacts: Electronic information flowing between the business partners could be at risk. Use of virtual private networks and a monitoring system which keeps a tab on the flow of information outside the organization would prevent sensitive information flow outside the organization.  Given the extensive use of IT in relaying this information, the question arises that is IT being used ethically. Zara’s designers often copy the designs based on information sent by the research team. Given the extensive investment by the fashion companies and designers on producing new lines of clothes, copying of the designs would have major impact on their reputation and profits. Zara being a fashion company itself, should realise this and instead use its current resources to innovate and provide the customers with value-ads that are not provided by the competitors.  Use of customer information to produce new fashion designs. This information is very vital and helps the company cater to the needs of the customers. Use of this information is completely ethical as it is important for the survival of the company but Zara should make sure that this information is not shared with any other company who might use it for its own strategic purposes.

9. References Dutta, Devangshu 2002, Retail @ the speed of fashion, viewed on 28th April 2009, www.3isite.com/articles Craig, A, Jones, C & Nieto, M 2004, ZARA: Fashion Follower, Industry Leader, Case Study. Retrieved September 15, 2015. www.philau.edu/sba/news Jessup L & Valacich J 2008, Information Systems Today: Managing in the Digital World, 3rd edn, Pearson Prentice Hall, New Jersey. Retrieved September 13, 2015. McKay, Judy 2009, Zara: Fast Fashion Supply Chain Innovator, Case Study, Swinburne University of Technology, Melbourne. Retrieved September 13, 2015. ZARAUnitedStates. (n.d.). Retrieved September 16, 2015, http://www.zara.com/us/en/company/our-mission-statement-c18001.html

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