OVERVIEWZara Philosophy

The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by.

— José María Castellano Ríos, Inditex CEO

OVERVIEWSpeed & Decision Making

Speed & Decision Making

• Zara needs to respond quickly to demands of their young & fashion conscious customers

• Fashion misses are very common as new styles can appear very suddenly

• Store managers have more authority than other stores such as deciding the garment to be put on sale

• ‘Commercials’ decide which garments to be produced & sold

• Have great deal of autonomy as higher management doesn’t second guess their decisions

OVERVIEWMarketing & Growth

Marketing, merchandising & advertising

• Very low spending on marketing while heavy spending on stores

• No ‘classics’ clothes but clothes with very short lifespan forcing customers to buy it on the spot, visit stores often

Growth Opportunities

• Currently 550 ZARA stores part of Inditex chain• Huge growth opportunities in Italy & western

European market• Hence there is need for new production &

distribution network

OVERVIEWManufacturing

Ordering & fulfillment

• Manual inventory management based upon direct observation & store manager judgment

• Use of PDA’s, Infrared, dial-up modem for order management

• Process is complicated & divided in various steps such as breaking order into segments and beaming these segments to concerned person who then filled up their part

Design & manufacturing

• Maximum time from conception to distribution centre is three weeks

• Vertically integrated supply chain ensured constant introduction of new items with short lead times

• Based upon commercial’s guess which need not be accurate

OVERVIEWInformation Systems

Information systems at La Coruna, factories, stores & DC’s

• Several information systems are used to prepare orders, distribute them over internets & collect them

• Factories had simple applications which provided information about order & due dates

• Distribution center had largest automation with complete tracking of SKU’s

• Stores used PDA’s which communicate to La Coruna via modems• PDA’s were upgraded constantly while POS terminals remained

same for over decade!• POS used DOS as operating system & its installation &

maintenance was very simple• No real time feedback from stores to Zara’s headquarters• Transmission required copying into floppy disc & then sending it

using internet which happened at the end of the day• No dialogue between PDA & POS inside store or between two

stores

Conventional Business Model Zara’s Business Model

Supply chainReliant on outsourcing production. Highly responsive vertically integrated supply

chain

Role of store manager

Deals with customers , employees Decision taking powers with respect to stocking

MarketingAds primarily for publicizing the assortment

Ads only for yearly sales & announce new store inaugurations.(0.3% of revenue)

Design teams Design conceptualized by Small elite team common for all segments.

Dedicated teams for different segments. Ex: Women-Night Wear, Kids-Sports wear etc.

Product life span Generally apparel firms produced CLASSIC clothes.Average new launches per year:2000-4000

Short life span but increased launches of new style clothing.Average new launches per year:11000

Time to market Comparatively high due to outsourcing. Industry average is 6 months.

As Zara is vertically integrated lead times as well as time for new product launches are less(2-4 weeks)

Sales Forecast It is done. Not done due to flexible factories.

IT Spending 2% of revenue as IT applications are outsourced to vendors

0.5% of revenue as in-house applications were developed

STORES

DISTRIBUTION CENTRE

DESIGN & PRODUCTION TEAM

“The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by”

Commercials-Dedicated to

Department in stores

Commercials-

Store Product Managers

Factories –

Dying & cutting clothes

Small Local Shops

-Sewing

2 DAYS

3 WEEKS

CURRENT STATUS

Current Status

• Zara currently uses POS system based upon DOS which is very easy to use & working fine for them

• This system does all the basic operations of billing but doesn’t provide any customer insights, real-time data or any advanced sales projections

• As Zara is getting bigger & bigger its operation are becoming more complex

• Hardware vendor may modify peripherals for POS so that they may not run on ancient OS such as DOS

Dilemna

• Shall they let go of DOS which is working great for them & migrate to modern OS such as Windows, Linux?

• If they are not migrating to new OS then should they stock up on current POS terminals to protect them from sudden loss of support from vendor?

• If they migrate to new OS, can they use this opportunity to build new capabilities in POS?

• If they are building new POS, then can they extend its capabilities so that it can have network across the stores & within the company?

ITDOS based POS

Why DOS based POS works for Zara!

• DOS based POS is in alignment with Zara's business philosophy• Majority of business concentrated in Europe specially Spain • Zara prefers speed based decentralised decision making • Highly responsive vertically integrated supply chain reduces need

for long range sales forecast• More dependant on market feedback from ‘commercials’ than

from customer data insights• Believed in ‘manufacturing on fly’ rather than long range sales

forecast • Zara doesn’t require theoretical inventory to be 100% accurate• Low level of inventory in current scale of operation: Zara stores

maintained low inventory levels thus reducing need for smart inventory management

• Current scope of operations makes ordering & fulfillment possible using DOS based POS

ITInstallation

Easy installation & ease of operation

• Use of DOS based POS is very user friendly, stable & easy to maintain• Layman like store employee can switch on system & set up entire POS

architecture• Complete software installation does the trick in the event of serious

software malfunction• No need for separate maintenance crew for POS as employees can do

it by themselves• Ease of customization on POS: Zara operated in various geographies

& currencies which necessitates need of customization• It is very easy to customise & write their own softwares on DOS

based POS• Majority of complex operations such as sewing, dying were

outsourced by Zara• Hence factories required simple applications rather than complicated

applications due to its current scope of business

ITIT Policy

Zara approach to IT policy

• Comparatively low spending on IT (0.5% of revenue) as compared to industry average (2% of revenue)

• No separate IT department, all decisions related to IT applications taken directly by top management

• No cost benefit analysis or formal justification for IT efforts• Preference over customised IT applications due to unique

nature of business• Recruitment of talent locally rather than from all over the

world• Thus basic principles of It policy of Zara is ‘keep it simple,

keep it cost effective’• DOS base POS achieved all these principles

ITNeed for New System

Why do we need a new system

• Zara is the only customer using DOS• Hardware vendor might upgrade their machines which are

not DOS- compatible• Vendor not ready to sign a contract • Centralized data to help expand in different countries • Following table shows the expansion of Zara in Asian

continent which would require the new system

TOTAL - 531

MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE0

50

100

150

200

250

300

350

400

450

307

75

419

SPAIN48%

FRANCE17%

GERMANY5%

GREECE5%

PORTUGAL8%

UK4%

OTHERS12% NO. OF STORES

• Majority of stores present in Europe• Highest concentration in Spain followed

by France • Ample room for growth exists within

Zara’s current markets

Increase in number of stores implies increase in Data-Base size & need for

real time data-base

GEOGRAPIC DISTRIBUTION OF ZARA STORES

IT System Layout

Modem• MOD

EM DC Factory

Common Network

New IT Layout

Current IT Layout

PDA- 1

PDA-2 PDA-3

PDA: 1

PDA : 2 PDA: 3

Store -1

Store -2

PDA- 1

PDA-2 PDA-3

PDA: 1

PDA : 2 PDA: 3

Store -1

Store -2

• No communication between stores • Unidirectional communication with

Modem

• Communication between stores possible

• Bi-directional communication with Modem

Efficiency •Better inventory management•Inter-connected stores•Real time customer insights•Trend analysis

Total investment (8.3 € mn)•Cost of replacing existing DOS systems•One time cost (License, installation, hardware)•Annual connectivity charges•Human resource for IT

Trade off – New System

Inditex North American Retailers0

0.5

1

1.5

2

2.5

Inditex North American Retailers0

0.5

1

1.5

2

2.5

3

IT Employee (%) of total

IT Revenue (%)

Order Fulfillment Process

Offer received in digital format

from La Coruna

Store 1

Store 2

Store 3

Segment 1 (Men)

Segment 2(Women)

Segment 3(Kids)

Store manager(Infrared)

Combined Order

Order is generated & given

to La Coruna

Offer received in digital format

from La Coruna

Store 1

Store 2

Store 3

Store manager

Order is generated & given to La

Coruna

Current Order Fulfillment Process

New Order Fulfillment Process

Financials in millions of EurosYear 2003 estimated 2002

Net Operating Revenues 4,848 3,974.0

Cost of Goods Sold 2,368.3 1,954.9

Gross Margin 2,480.0 2,019.1

Operating Expenses 1,480.6 1,179.8

Annual operating cost 0.127 -

Operating Profits 999.4 839.3

Non-Operating Expenses 288.1 224.3

POS up gradation cost 8.2 -

Pre-Tax Income 703.0 615.0

Income Tax 213.2 172.5

Minority Interest 5.8 4.4

Net Income 483.9 438.1

Net Margin 9.98% 11.02%

• CAGR of 22% calculated using past data of 1996-2002• Rest of the costs such as COGS, operating costs are calculated based upon past data• Migration to windows based POS will cause net margin decreases to 9.98% but well above

average net margin of 8.29%• Cost of up gradation can be funded through cash & cash equivalent of 525 million Euros

Total cost of up gradationParticulars Cost (in Euros)

Operating System cost (windows) 4,51,350Hardware cost 28,83,330Connectivity cost 1,27,440Installation charges 42,48,000Programming cost 6,00,000Total cost 83,10,120

Break up of costsOnetime costs 81,82,680Recurring cost 1,27,440

• Recurring cost includes annual connectivity charges

• Rest of the costs are one time cost only

Roadmap & Implementation

Requirements

• Gathering and analyzing the requirements of the new system on the upgraded OS• Proof of Concept for feasibility• Selecting a migration method

Design & Implementation

• Identifying the resources and availability• Prototyping, Designing & Implementing• Testing the new system

Migration

• A pilot run of the system for a country having less customers as compared to other countries

• Existing system running in parallel to the new system• Migration of data from old system to the new system after the successful pilot run