Zara: It for Fashion
Report Title: Zara: IT for Fashion Executive Summary: Zara is a fashion company founded by Amancio Ortega in Spain in 1975. It is part of Inditex holding company, a large fashion retail chain that operates five other clothing brands. Since its inception, Zara has been financially very successful as it contributes the most to Inditex’s overall revenue. Also, Zara’s fast growth is represented by its massive global presence; it has stores all over the world from Americas to Middle East to Europe, its principal market.
In my analysis, Zara’s competitive advantage lies in its ability to mass produce a large range of highly demanded latest designer clothes faster than its other competitors in the industry. By virtue of being first in the market, Zara is able to gain a larger chunk of the revenue pie than its competitors. However, Zara’s financial success and global brand recognition hides many structural inefficiencies and wastages across its business units.
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My analysis shows that Zara’s main problem stems from its inability to value the importance of having the right information at the right time.
This is evidenced by Zara’s hesitance to invest in suitable technological infrastructure that collects, analyzes and interprets valuable data to make the most effective decisions. Furthermore, Zara’s organizational structure is plagued with disjointed business units that fail to understand the relationship between two separate units within the organizations. This faulty organizational structure has not only severely hampered Zara’s ability to garner synergies among its business units but also has become the source of lost revenue due to inefficiencies and wastages.
Finally, the culture of making important business decisions within Zara by its management based off of gut feeling rather than a well analyzed business information, patterns and statistical method, greatly dangers Zara’s competitive advantages over its competitors. I would recommend Zara to tackle its two biggest problems– a) absence of modern technological infrastructure and b) lack of collecting, storing and sharing infrastructure needed to generate vital business information to make quality decisions.
This recommendation entails the use of Windows based new POS system for all the Zara stores. Also, the use of cloud computing to collectively store all its data that could be used in generation vital business information. Furthermore, I would recommend the use of tablets instead of handheld computers to increase efficiency and communication capability in all of Zara stores. I would broadly divide the structural problems with Zara into two categories: 1. Outdated Technological Infrastructure
The biggest problem within Zara is that they lack appropriate technological infrastructures that aid in the decision making process. I absolutely disagree with Sanchez’s argument that Zara does not need to fix something, in this case its POS system, if it is not broken. He also argues that upgrading the POS systems would make it more complicated. In my analysis, Sanchez’s argument fails because he sees Zara’s current comparative advantage in various market segments as a permanent thing rather than something that is constantly changing.
Secondly, by opting for simplicity, Zara is sacrificing efficiency and effectiveness. Ultimately, the absence of the suitable infrastructure that can collect, analyze and interpret data to aid Zara’s commercials, store product managers and store managers to make quality decisions, makes Zara vulnerable to fall behind its competitors. Below are the few examples, where Zara’s lack of advanced technological infrastructure hurts them and possible solutions. First, Zara’s outdated technological infrastructure is inhibiting its speed and decision making ability throughout the organization.
Zara is a company that depends heavily on capitalizing on new fashion trends rather than on expensive advertising campaign. Thus, it is imperative for Zara to correctly identify new market trends and execute manufacturing orders before its competitors. But it is unlikely that commercials at Zara will be able to consistently predict the new fashion decision without analyzing relevant data to derive information and business decisions. They may guess the new fashion designs correctly few times, courtesy of their experience, but in general their prediction will miss the target more often than not.
So, unless Zara updates its archaic infrastructure that can efficiently collect data, help managers develop patterns and better understand the market, they will be forced out of the market. Second, Zara’s ability to forecast and analyze its performance under various market situations is handicapped by its old infrastructure. Most businesses that are successful take into account and analyze all the possible scenarios that can affect them before making critical decisions.
Usually called event-driven analysis or simply, what if analysis; it gives a business a sense of all the possible opportunities and threats out there in the market. However, a business mostly requires a large amount of data that they need to analyze in order to conduct a successful what if analysis. In Zara’s case, they lack that data gathering and sharing ability because of their old infrastructure. So for example, Zara has no clue how their revenue is going to be impacted if Benetton opens up a hundred new stores in Madrid.
This is serious problem for Zara because it may be losing market share but they have no accurate way of verifying it. Furthermore, Zara’s dependence on MS-DOS based POS system is threatening its viability as a business at a store level and limiting its expansion opportunities. Mainly because Microsoft has discontinued its support for MS DOS and Zara’s suppliers aren’t willing to a long term contract that guarantees future supplies of MS DOS based POS, Zara is in a vulnerable position. Also, the situation within a Zara store, in terms data collection and sharing, is dangerously low.
For example, a Zara store manager currently cannot access critical business information necessary for decision making. Even information on simple things such as the sales figure, the pattern of sales, and the number of unsold items are unavailable to the store manager. Rather a Zara store manager currently has to rely on canvassing the store to determine generate business intelligence. Similarly on the hardware side, a Zara store managers over reliance on an outdated handheld computer is putting the prospective revenue of the Zara’s business at tremendous risk.
Currently, a Zara store manager uses a hand-held computer with a very small screen, probably with poor image quality, to analyze information about the new clothing designs and then decide. In an artistic industry as fashion where people care about even smallest of small details, the store managers are asked to value and to decide their portfolio of new clothes using a device that is inadequate. Furthermore, the store managers have to rely on a dial up connection, which has a host of issues frequently, to link up with the office at La Courna once every night.
With the store managers facing “hard deadlines” to post their orders and they having to rely on a dial up connection to send that important order, the pressure on the store managers must be very high. Possible Solutions: First, at a store level, Zara can choose from Windows, Unix or Linux based POS to replace all of its outdated MS-DOS based POS. In my analysis, a new POS based on Windows OS is the best solution for Zara’s current needs. First, the regular OS upgrades provided by Microsoft eliminate Zara’s concern about its OS being outdated.
Zara can also leverage Microsoft’s variety of well tested software packages to aid in the collection, storage, analysis and interpretation of business information. Furthermore, with windows Live software such as SkyDrive, individual Zara store can store all its vital data in the cloud and share it among commercials and store product managers in different locations. Also, one benefit of using Microsoft OS is that almost all big software developers use MS OS as their primary platform. This ensures that Zara will not be disadvantaged due to incompatibility of major software.
While on the other hand, licensing and maintaining fees for Windows can be expensive. Also, the issue with security may be a big concern for Zara as it uses Microsoft OS which has a history of being vulnerable to hacking, virus infection and so on. Second, Zara should upgrade to new POS terminals rather than reprogramming the new OS to fit the old hardware. First, there can be a problem if old hardware is not compatible with the new OS despite re-writing and customizing the new OS. Furthermore, the old hardware may fail to fully utilize the capabilities of the new OS system.
More importantly, it may be faster for Zara to replace all the POS than reqrite the program for the old hardware. But the criteria for the new POS system should be that it should be able to store and communicate data to the central office at La Courna and to the store manager. Finally, an android based over an iOS based tablet could be a reasonable alternative to the current use of handheld computers. Because android tablets are more compatible with the Windows OS, which was the OS of choice for Zara, I would recommend an android tablet.
Also, android tablets provide Zara store managers the ability to access critical business information from the cloud and easily communicate with the central office to place orders, evaluate new fashion designs, and send or receive critical business information from La Courna. Also, these tablets are compatible with a host of different spreadsheet and document applications that a Zara store manager could rely on to get vital business information before making purchase decisions. 2.
Bad Business Practice: Random Decision Making, a Culture inside Zara. In my analysis, the culture inside Zara of allowing lower management to take important decisions such as production schedule and stock distribution based on their gut feeling and yet not checked by senior management, is simply too dangerous. Any business management student can attest that delegation of higher responsibilities to junior staff members and independent decision making is positively correlated with higher performance and returns, and I am all up for it too.
However, research also has shown that in terms of decision making, the best decisions are made when experiences of managers are combined with their analysis of business information. While currently in Zara, decisions are solely based off of experience with no use of business information to draw inferences about pattern and trends. The primary two problems with such method are that those decisions tend to random and also, heavily biased towards personal preference and beliefs. A company like Zara cannot afford bad decision when its comparative advantage lies in producing clothes of the future.
Below are the few examples of random decision making within Zara which have resulted in wastage and time lag and possible solutions to eradicate them. First, the decisions about Zara’s production based on random experiences can be very costly. Currently Zara’s store product managers, who decide what new design is approved in Zara, largely rely on their random observations of what people are wearing and conversations with Zara store managers to predict the next big fashion hit. However, decision making on the basis of experience alone tends to produce more misses that hits.
And for a company like Zara which heavily depends on rapid production of latest fashionable clothes, “fashion misses” can be extremely costly. The ideal situation would be to allow business managers to combine their experience with valuable business information to derive business strategies and then apply them to decisions about future fashion trends. Similarly, the approach of commercials within Zara to decide the allocation of replenishment, highly demanded clothes in SKUs or DCs and most importantly, newly designed clothes is misguided.
The current practice within Zara regarding allocation is to divide the available stock among all the Zara stores who wanted it. The critical problem with this approach is that it ignores the concept of opportunity cost. For example, let’s assume that using a detailed analysis, a commercial within Zara concludes that a piece of clothing “A” is highly demanded in London than in Bahrain. With this information the Zara commercial can push clothing “A” completely towards stores in London where it is highly demanded at the expense of stores in Bahrain.
Rather than allocating among all stores, the approach of using business information to decide which stores have higher opportunity will be better for Zara’s bottom-line. Conversely, when the demand for the clothes exceed supply the Zara’s commercials allocated by looking at past performances and previous supply records. Although, this method is significantly better than the simple allocation, it could be much better if the commercials used further scenario analysis using previous business information to check if the success of the stores were a one off events or whether previously unsuccessful stores have turned a corner.
Possible solutions: Zara’s main problem stems from its lack of infrastructure that is able to collect, store and communicate data so that all the responsible individuals within Zara can use it to make good individual decisions. Among the myriad of a Network options with the aforementioned capability, In my analysis, could computing is ideal for Zara. The advantages associated with using the cloud is its scalability. In the near future, Zara aims to expand its stores and its operations to new locations all across the globe.
With a cloud based software the increased need to collect, store and share data within the Zara network will be as easy as buying extra space from the a cloud hosting services. In addition, cloud computing almost infinite amount of storage to store and backup data. This will be ideal for Zara who has a large number of store spread across many continents. Furthermore, unlike a distributed network, with cloud computing Zara store managers, commercials and store product managers can share common application software directly from the cloud without having to purchase or physically transport the software.
However, security of the highly sensible data is a big concern when using cloud computing. Unlike a distributive network, there remains a threat that a close competitor in the industry unfairly accesses critical business information such as Zara’s new clothes design or cost of production, supplier’s list, when using cloud computing. Final Recommendation: My final recommendation for Zara aims to tackle two big problems within Zara – a) absence of technological infrastructure and b) lack of collecting, storing and sharing vital business information to make quality decisions.
My first recommendation for Zara is to build a sophisticated technological infrastructure across the company. Zara should replace its old MS DOS based POS with a Windows based POS with advanced features such as touch screens, bar code reader and credit card to increase the overall efficiency and speed of transaction. Also, the development of a customized software that automatically stores detailed data about the transaction such as type of design, time (days, months), and cost automatically from the POS system and saves it in a cloud space.
Also, I would recommend the use of tablet, preferably android, for individual store managers so that they can have easy access to vital business information in real time and also be able to communicate with the central office and DCs. Furthermore, I would even suggest providing tablets to all commercials and store product managers so that they can have access to specific and vital information about all aspect of the business directly from the cloud. The analysis and interpretation of all the information will enable them to making production, future design decisions, and allocation decisions.
My second recommendation for Zara would be to subscribe to a cloud computing service provider in order to store all relevant data from all its stores, its DCs and SKUs. Also, I would suggest Zara to build customized software that has the capability to correctly organize relevant data into different categories according to specific need of different management levels within Zara. Regarding the security issues with using a cloud computing, Zara can enforce cloud storage access password on the basis of seniority in the management hierarchy.
So for example, a temporary sub-store manager cannot access the future clothes design for Zara while a commercial has a full access. However, I would not recommend Zara to get involved in selling clothes online. Zara’s comparative advantage lies selling clothes through it well designed and strategically located stores that span all over the world. Thus, unless Zara can build up huge storage and distribution centers, hire e-commerce specialists and figure out a new business model, I wouldn’t suggest Zara to go online.
Within the current organizational framework, going online would do more harm than good. The implementation of these two recommendations will insure that all the members of the management team have all the vital business information in real time in order to make an informed decision. Also, it will insure that Zara’s stores serves dual function efficiently serving customer and also providing important data back to the head office in Spain. ——————————————– [ 1 ]. Stock Keeping Unit [ 2 ]. Distribution Centers