Zara Case Study

1. Case Summary

The Zara case study is a case of the fundamental of whether or not to upgrade an IT system which already works, in this case a POS operating system that uses DOS, to more modern operating systems that includes more functionality to meet new demands.

Zara is a chain fashion store around Europe, Middle East, Africa, and South America that was founded by Amancio Ortega, in 1975. The first store and main headquarters was found in La Cournia, Spain. Mr. Ortega believed and implemented his business model that: Retailing and manufacturing needed to be closely linked. This created the backbone for Zara’s everyday functionality to have all the stores communicate with the main distributors and distribution centers (DCs) which in turn communicated directly to the manufactures. As a result, supply was meet with demand with ease and little latency.

This was all made possible through the use of technology and Zara’s IT department. Salgado Badas, the head of the IT, along with Bruno Sanchez Ocampo, were the main decision makers and brains behind the IT of Zara. For the past decade, Zara has implemented POS systems in each store that would have a direct connection via modem to the main headquarters in La Coruna. Managers on a daily basis transmit comprehensive sales information and other data back to La Coruna. In 2003, PDA’s were also used for ordering and also for tasks such as handling garment returns to DCs and transmitting information from headquarters to all stores. All this technology created a seamless environment that allowed the managers and teams of each store to communicate directly with headquarters which was directly linked to the distribution centers and manufacturers. It was a system that had very little flaws and worked without any major headaches. However, the main issue was that the aging technology was becoming obsolete. The POS systems which used the aging DOS operating system was a concern to Salgado, whose main concern was that the DOS operating system would no longer be supported by its main vendor. Moreover, the new functionalities that are available with upgraded POS systems and new operating systems meet the new functionalities and demands such as the ability for every store to communicate with one another and check each other’s inventories for a particular SKU. PDA’s can also be used wirelessly to communicate between each other and create a more communicative environment, for instance. Nonetheless, Sanchez has taken the opposite side of the argument and states that the POS system in place already functions successfully and is well understood by the mangers and employees and the various locations, so why should they take the risk and change a system that already works. Sanchez believes that the risks outweigh the benefits for Zara and its ability to function the way that it has been. Sanchez’s main concern is that a new operating system and POS terminals would need to be re-taught and understood by every employee who uses the technology at an everyday basis. Moreover, Zara would face new technical hurdles and may create hassles between the manufacturer, distributor and ultimately the stores if technical issues arise due to the complexity of more advanced systems. So the question remains whether to upgrade an already functioning system or to take the risks and upgrade the technology that can meet more new demands.

2. SWOT Analysis
Strengths
Zara’s success has been mainly due to its well thought and planned system that links all their manufacturers, distribution centers and stores together. One of the strengths of Zara’s business model was that it didn’t necessarily allow the decision makers in headquarters make all the fundamental decisions. They allowed decisions to be made by store managers and a group called “Commercials,” dedicated to each section of the store, that were assigned in each store to make many important decisions. In other words, judgment and trust was placed on the employees throughout the company and not to just a few decision makers. This allowed Zara to make quick responses to what clothes or items needed to be replenished by the manufacturer and understand what was more or less in demand. Zara also spent relatively little on advertising, they virtually had no advertising. Their marketing expenditures averaged 0.3% versus their competitors that spend typically 3-4%. The company only placed ads to promote its twice yearly sales to announce the opening of a new store. Although, Zara spent little on advertising it has invested a lot into its stores. Furthermore, their stores were always located in primes retails districts and major streets. Supply and demand has always been meet by the implementation of Zara’s business model. To quickly satisfy consumer demand, Zara implemented three cycles: Ordering, fulfillment, design and manufacturing. These cycles were accomplished by “commercials” and mangers that collected and send data via POS terminals and PDA’s to instantly distribute information between the distributors and manufactures that completed these cycles.

Weaknesses The main weakness that lie with the company was the age of its technology that it useed to communicate between the different locations and centers of the company. For instance, the DOS operating system found within its POS systems have not been supported by Microsoft since 2003. Moreover, the out dated technology was a disadvantage against its competitors (ie. Gap, H&M) that use more recent technology that include more features and flexibility. The only way to overcome this weakness would be to upgrade the systems to a more updated operating system. Nonetheless, the infrastructure of the company remains strong. The Business plan and model of the company remains intact and well thought of to keep the company competitive enough to survive and remain successful.
Opportunity
One market that Zara has stayed away from has been the internet or ecommerce. In the twenty first century, many consumers prefer to shop online and spend less time shopping in the malls. One reason, the Zara has not stepped into ecommerce was because their distribution centers has not been designed for picking small orders and shipping them to consumers. Moreover, Zara felt that it was complicated to handle returns and merchandise that was purchased online. However, this created less opportunity for Zara to reach consumers around the world. For example, in countries where the stores have not been established, a consumer may still be able to make purchases through the internet allowing the consumer to still make purchases and allow Zara to reach a broader market.

Threats The company may be too over confident with its current business model. The biggest threat that Zara faced, was its inability to compete with companies that were implementing newer technologies and markets that integrate an edge with ecommerce via the internet. Zara’s unwillingness to change and adapt for the twenty first century, may be its biggest threat to its already successful and functioning business model. Furthermore, the environment it faces today (i.e. ecommerce) creates a more competitive environment for it to survive globally.
3. Whether or not Zara should upgrade its IT capabilities For the past decade, Zara has been using the DOS POS systems at each store to communicate between its main headquarters and distribution centers. It was a system in place that worked and is effective to process orders and resupply its inventory whenever store managers or commercials felt that there was a need. However, the managers have made an issue that they would like technologies to be able to check the inventories within other stores, which the current technology does not allow the functionality to check. Moreover, floppy disks were used to submit data to headquarters via a single modem terminal each day. Managers and employees have demanded that more new PDA’s be used that can communicate wirelessly and allow more flexibility with more functionality. The debate to whether or not Zara should upgrade its IT capabilities lies on the amount of risk the company is willing to take with the requirement to learn new technology versus the ageing system that already functioned and was already in place. Zara would need to assess the costs involved to upgrade the systems and develop a program to train all the employees to learn to use the new technologies. Although, upgrading would increase the risks of facing new technical issues and hurdles, the benefits outweigh the risks. Moreover, the newer technologies would give Zara an edge or remain in par with it competitors that have already adapted and have began using newer technologies.
4. How can Zara improve its supply chain management? Zara already has an efficient process to resupply its inventories from manufacturers that takes no more than two days as a process. Managers and commercials in every store, determine what needs to be resupplied and what needs not to be ordered anymore, depending on the factors of demand and sales. This information is outputted via the POS systems to headquarters where the final decisions are made to distribute products or SKUs that depend on availability and demand for a particular product. At the time with the present technology Zara has been using, everything was done through the decision making of individuals such as store managers. However, the IT can develop new applications and software with the usage of more new POS systems and technologies to automatically have particular products resupplied when an item or product when sold. For instance, programs can be used to determine the amount of a particular SKU that has been sold on a particular day and determine which SKUs are in more demand. Furthermore, they can then transmit this data to headquarters and manufacturers automatically. As a result, this would increase the efficiency of the supply chain in its ordering and fulfillment phases that are already in place which would reduce cost, labor and responsibility of individuals.

Reference Page 1. Mcaffe, A, Dessai, V, & Sjoman, A. (2007, Septemeber 6). Zara: IT for Fast Fashion. Harvard Business School.