Zara: IT for fast fashion case study

I would like to published my report of Zara: IT for fast fashion based on Harvard Business School case study. This report included in my Global lotistics class of Kyushu Business School.

Case #3 Zara: IT for Fast Fashion

  1. Describe Zara’s business model and its superiority over other competitors in the industry

Zara is one of the world largest fashion retailer. Amancio Ortega, Zara founder believe in close relationship between retailing and manufacturing is key for apparel industry because of unpredictable demand.

Fashion industry changes quickly since their target customers are young, fashion-conscious city dwellers. Their taste of clothing changes rapidly. Instead of marketing and advertising their clothing campaign like its competitors, Zara’s value proposition is chasing fashion trend by product and deliver any style of cloth while it still hot with their capability to quickly respond to the fluctuating demand.

Zara’s core capabilities rely on the frontline employees that currently run 6,500 stores in 85 countries who are in the closest position to their customers. They trust on their employees’ intelligence and judgments on which garment should be on sale at their store rather than making decision from their Head quarter. Moreover, their “Commercial” team which include designers and product managers has wide range of responsibility from purchasing material, placing production order or set the sale prices.

Zara did no above-the-line marketing instead it has three strategies to advertise its products. First, it spends heavily on its stores location to located in the city prime’s area which has a large people traffic. This helps it to gain more recognized form their customer without direct advertising. Second, rapid changing the products makes its customer to visit their store more frequently because the new collection will come and if the customers do not purchase the current displaying garments it might be gone before the customer next visit. Last, Zara clothes are designed and manufactured to be fashionable but not durable. This increase the number of repurchasing as well.

Its operations objective is to reach its quickly and accurately response to their customer demand Zara has three major process to make these happen. The first one is “Ordering”, store manager placed order to their H.Q. twice a week for newly available garment and replenishment of existing items. This process is made less than 24 hours from a digital order form. Ordering makes shorten the process of ordering in the old way from sending fax back and forth of a long-long fax paper from each retail store. It speeds up the process by using the IT technology enhancement on their ordering process. Next, “Fulfillment” this process is to match the number of garment demand with the supply from their distribution center (DC). In normal case, when supply and demand nearly meet. The process let the computer to divide its inventory for each store. There’s no action needed. This minimized the human error of inventory fulfillment and increase the fast response in the day to day operation. However, in case that supply is less than demand, the system helps the commercials team to make decision on which area to ship their product to based on historical sales data.

Zara has the most number of items introduce to the market around 11,000 items per year more than its any competitor average 2,000-4,000 this offer their customer more choice to shop their new cloth easier.

With the short lead time from planning to production in 3 weeks plus delivering to retain store within 2 days this also make Inditex the leader in fast fashion retailer that no others competitor can compete with this capability.

Financial results of Zara reflect its excellence operation and cost structures. The growth of its operating revenue has almost quadruple in 6 years from 1996-2002[1] and still growing. Its cost of good sold account for around 49% second lowest after H&M at 45% while Gap has 66% of their cost of good sold this number represent its good position in cost control as a result its net margin around 11.02% close to H&M at 12.49%.

Analyze current and potential weakness in Zara’s IT infrastructure and their strategy

Currently, Zara do not have any formal IT strategy or position to make it clearly. This makes their IT efforts unmeasurable on its current and future actions on its pros/cons on both IT and business perspectives which could put Zara business stuck in technological limitation and make their business slow down than its competitors. For instance, Sanchez propose solution to stock up the POS machine to prevent lacking of POS machine in the future in case their venter discontinue its production line. This might be one of the possible solution. However, in the business perspective to purchase assets with out using it this will affect their financial performance more or less.

Zara’s IT infrastructure relies on an obsolete technology such as POS terminals run on DOS operating system or personal digital assistants (PDAs). The major disadvantage of this operating system is there’s no longer support by any software company anymore. This might be a great threat to Zara’s business expansion because the technology limitation that unable to have new functions or features response to its business need that might have required immediately in the futures for instance shared inventory information system for nearby retail store location that might lower its logistics cost and shorten the lead time instead of waiting for the next offer in the next 2 weeks.

Zara POS terminal vendor might shutdown their POS machine production line in the future because the cost of producing an obsolete machine might surpass the modern one. Zara does not have any commitment on keep producing its POS machine from its vendor. This will reduce the speed of expansion of its retail store.

Limited to scalability also a major weakness on its current infrastructure. Zara use such as a modem to connect and transmit their sale information or placing order on new and replenishing items. The modem technology has limited functionality such as speed and encryption. The speed of modem might no longer support a large amount of information transfer from increasing the number of retail branch to their H.Q. and manufacturer.

Security on sale information by carrying the floppy disk around the retail store might also cause data loss or leakage. With out secured connected network from each POS machine to HQ or nearby store.

with the upgrade system, what kind of information do you think they should exchange between stores and their H.Q. in La Coruna?

To enhance the speed of sales, quickly response to customer needs and also shorten the lead time making from offering process to fulfillment and manufacturing. They should have a platform to share information start from the retailer back to its head quarter or nearby store such as the number of sale on each SKU on each branch. Number of inventory available for each area. New items available in nearly future.

The number of sales on each SKU in real time, this number help to forecast the number of supply cloth to produce in the nearly future without waiting for employees to submit the total amount of sale information at the end of the day. Also, it can prevent item loss, theft damage or other loss by matching with current inventory number.

Number of inventory available for each area, this number will optimize the inventory available in the same area in case that there’s any available item is required by the same area location. It might possible to notice the customer or deliver to their nearby branch without waiting to make the offer transaction in the next 2 weeks.

New items nearly available, this information will helps store manager to decide in advance which item should they order and display in their store in the next offer instead of making a rush ordering within 24 hours. Also, The new items could help their store to advertise to their customer in advance to get the number of interested customer which will optimize the number if supply to produce more accurately.

  1. Any suggestion for Zara to keep competitive advantage.

 

Management of IT Zara should consider to settle their IT strategy by consulting firm or outside professional to keep they focus on their business and leave the support function to others.

In the technology perspective, the company might consider a public standard technology that does not rely on any vendor to increase their scalability and support their business growth in the future such as web technology or cloud computing.

Web technology is a standard for any device with internet connectivity to connect and share the information in a secure way, this innovation was defined by a non-profit organization The World Wide Web Consortium (W3C)[2] and continuous developed by several world leading company in technology such as Google, Microsoft, Mozilla Foundation, Apple, NTT Docomo, Toshiba Corp, Samsung Electronics and many Universities. This technology is an open standard which Zara could leverage its benefit to apply and customize for its business needs such as a customized new function features to serve store manager in order to make quicker offering and even shorten the lead time from two weeks of production or new item display on store or website which help Zara’s customer can visit a virtually fitting room[3].

Hence, with its benefit such as public open technology (free of charge), standardize, continuous development and scalability it will helps Zara to layouts its IT infrastructure to meet its business growing more flexible.

Another concern about changing in technology is the cost of newly adapted technology might have a large investment which more or less affect the company financial status. Cloud computing might be another choice on Zara technology change since its transform current software license business model from long term contract and large investment on software, hardware and human into pay-as-you-go (PAYG) model[4]. This means the Zara instead of invest large amount of cash into new IT infrastructure, it still could focus on the business competency and use the IT infrastructure as an expense and pay with the rate of its business growth.

 

[1] Inditex Historical Financials, Zara: IT for Fast Fashion Harvard Business Case.

[2] http://www.w3.org/Consortium/Member/List, W3C member list

[3] http://www.fitnect.hu/references/, Virtual mirror and fitting room

[4] https://www.pdc.kth.se/members/edlund/2009-May-27-LitGrid-Vilnius.pdf, Cloud computing. Pay-as-you-go explained. Aake Edlund