ZARA’s IT for Fast Fashion
Ezra, a trendy Spanish clothing retailer founded in 1975 by Manioc Ortega in La Curran. It is a flagship retail store of Inedited Group, a holding company that owns other fashion brands such as Misaims Audit, Berserk, Pull and Bear, Strabismus, Kiddy’s Class, and Shoo. The company still lives by the simple idea of Amoco Ortega to link customer demand to manufacturing and link manufacturing to distribution, which ultimately able to respond very quickly to the demands of targeted customers, who are young and fashion-conscious city dwellers.
Inedited operates 1,558 stores in 44 countries, of which 531 stores are part of Ezra chains. Ezra generates a majority of Indies’s sales accounting for 73. 3%. Of the three departments inside Ezra, Women accounted for 60% of sales, with the rest evenly split between Men and Children division.
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In 2002, Inedited posted a net income of ?¬ 438 million on revenues of ?¬3,974 million, which is a net margin of 1 1. 02%. Overall, the company shows net margin continuously growing indicating profitable growth. As a result, the company’s earnings have tripled since 1996.
To reach consumer’s demands quickly and accurately, Ezra established a recurring process of ordering, fulfillment, and design and management. Each section (Women, Men, and Children) of a Ezra store places an order to headquarters twice a week on the store’s PDP devices. The orders include both replenishment of an existing item and requests for a new items. Store managers determined replenishment quantities by walking around the store and determining what has been selling by counting garments and talking to salespeople.
Fulfilling each store’s demands of clothes involves group of commercials from headquarters, who are responsible to match up the supply of finished clothes coming from factories to distribution centers then finally to the stores. The commercials works with two types of information – aggregated orders from all stores and the total supply of inventory in the distribution centers at the same point in time. Finally, Ezra introduces new design collections at the start of fall/winter and spring/summer buying periods. In addition to that, they continuously introduce new items throughout the year, allowing them to be ahead within the industry.
Note: Detail information for design and management is in “Competition” Section). SUPPLIERS: Ezra owns a group of factories in and around La Corona to do the initial production of dyeing and cutting cloth. However, they sent out the cut fabrics that needs to be sewn into garments, to network of small local workshops (not owned by Inedited) in Galatia and northern Portugal, which guarantees quick turnaround time. Finally, the sewn garments are sent to a Ezra facilities, where they are ironed, inspected, tagged, and sent to a distribution centers.
COMPETITION: Ezra faces competition from multinational clothing retailers such as Gap, H&M, and Benton, Combined, these companies has over 200,000 employees, operating in 140 countries with net income of ?¬1,067 million or a net margin of 15. 3%. What separate’s Ezra from its competitors is it’s unique approach to its marketing and business operation. Unlike its competitors, Ezra virtually does no marketing. The company place ads twice a year promoting sales and to announce the opening of new stores. As a result, their marketing expenditures average 0. % of revenue, instead of 3%-4%, which is typical for competitors. They also always make sure their stores are located in a city prime retail district and the prices for their items are established for the Spanish market. Prices for other countries is set at a fixed percentage of this baseline, taking into account distribution costs and market condition. Ezra also priorities time-to-market through vertical integration enabling them to constantly introduce new items throughout the year in a short period of time.
In a typical year, Ezra introduces approximately 11,000 new items, were as its competitors average 2,000 – 4,000 items. Consequently, Ezra does not try to produce classics” clothes that would always be in style. They intend their clothes to have a fairly short life span. About 75% of the merchandise in the average store is changes over three to four weeks, resulting in their experience shoppers to visit the stores often to purchase the new items. Furthermore, Sara’s senior managers takes advantage of their employee’s intelligence and trust their Judgment in decision making.
Store Managers are given responsibilities to deal with customers, contractors, landlords, and decisions in garments should be on sale at their individual stores. They place orders for the teems they think would sell, rather than simply accepting and displaying what headquarters decide to send them. Ezra has minimum invested in IT budget and has no formal process to set decisions for specific technology investments or projects. Usually senior management decides what new systems, if any, is required.
Overall, there is very little Justification for IT efforts, which results in having no cost/benefit analysis for current and future projects. Also, Sara’s business model uses POS terminal that runs on an outdated DOS operating system, which is not supported by Microsoft. This makes the operations such as ordering, fulfillment, design and manufacturing, and in-store operations inefficient. They also use handheld Pad’s for ordering and for tasks such as handling garment returns to distribution centers and conveying information from headquarters to all stores. This causes redundancy.
The POS terminals also makes 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 SSW, which is a time consuming process. Finally, Ezra makes no use of the internet to make sales. The website is only there to maintain a presence. The issue for lack of internet sales is because the company’s distribution center is not configured for picking up small orders and shipping to consumers. And, it is complicated to handle returns of merchandise bought online.
The challenges above shows where Ezra can make the use of proper IT/IS infrastructure. Currently, Ezra has continued to use their systems without any changes to it. However, they have the opportunity to improve its infrastructure by investing in new IT systems. This proper implementation can also provide great opportunity for Ezra to improve its value ham operations. Before Ezra makes any decision regarding the upgrade of their old information system, they need to analyze the costs and benefits of the new system.
A new operating system such as Linux, Windows, or UNIX, it will allow Ezra to develop capabilities on the outdated DOS software for POS terminals. As they install the new operating system on all the computers, they need to consider the costs of each operating system. For example, Linux does not have one-time license cost, while Windows has a one-time license cost of ?¬140 and UNIX of ?¬160 per CUP]. Linux may offer the cheapest implementation costs for Ezra, but they have a higher ongoing costs, such as service contract cost that ranges from ?¬10-?¬150 per CUP].
To upgrade the system Ezra will also have to install new hardware and replace the old POS terminals. The cost of POS terminals is ?¬5000 per store, 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 connectivity cost per store, will also add to the upgrade costs. Overall, if Ezra decides to use Linux operating system, the total cost for the initial year will be ?¬ 56 million.
This includes ?¬ 379 thousand of operating cost and ?¬ 2,777 million for non-operating (fixed), which is purchase of new POS terminals, wireless router and wireless Ethernet. If they use Windows or UNIX, total initial cost will be ?¬ 3,167 million or ?¬ 3,175 million, respectively. This may be a very costly for the company, but it is a direct expense, which meaner the cost will depreciate over the years. For example, the total operating cost for Linux, Windows, and UNIX will decrease to ?¬ 371 K, ?¬ KICK, and ?¬ ASK in the second year, respectively.
The benefit of a new system will improve Sara’s efficiency, which will directly influence their revenue. With the smooth communication among the stores and the headquarters, Ezra can better predict the future needs of material, and save cost by hedging them at a low cost. The system will also allow them to make clothes prototypes at a quicker rate and get a faster response from the customers. Therefore, there will be more sales, less cost, more revenue, and ultimately more profit. RECOMMENDATIONS I would recommend Ezra to upgrade their current system gradually. In the short term, there is no immediate need to upgrade the system.
However, they need to make the changes over a long period of time. First, senior management should develop a formal IT department by hiring a COT to set decisions. Second, the new IT team should develop a strategy for the change. Third, they should develop a budget for implementing the whole upgrade. Once they have the strategy and budget in place, they should stop any more investments in the current systems and conduct a pilot test at one of their flagship store to collect data of its outcomes. Ezra should make the investments in stages. For example, the current Pads used for ordering are inconvenient.
They should be replaced with convenient equipment such as the PC’s. In addition, the Pads and POS are not connected. In order to improve the networking capabilities at each store, Ezra should switch from modem-based network to a broadband-based network. This will allow them to stay connected with the other stores as well as with the headquarters. POS terminals that operates on the outdated DOS system needs to be updated with a more modern and compatible operating system. As a result POS should have the customer based functionalities that will scored sales, returns, exchanges, etc.
POS system should also handle functions such as inventory control, purchasing, and receiving and transferring of products to and from other locations. After the final stages, I strongly recommend to run the old and the new systems side by side, until the new system is operating smoothly. Finally, Ezra should use the internet to make online sales, and take advantage of the social media to promote itself. This can enhance their operations and ultimately increase revenue. Also, it will give them more competitive edge with the new competitors and the existing competitors.