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OVERVIEW

Zara 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.

Jos Mara Castellano Ros, Inditex CEO

OVERVIEW
Speed &
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 doesnt second guess their
decisions

OVERVIEW
Marketing &
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

OVERVIEW
Manufacturing
Ordering & fulfillment

Manual inventory management based upon direct
observation & store manager judgment
Use of PDAs, 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 commercials guess which need not be
accurate


OVERVIEW
Information
Systems
Information systems at La Coruna, factories, stores
& DCs

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 SKUs
Stores used PDAs which communicate to La Coruna via
modems
PDAs 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 Zaras 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 Zaras Business Model

Supply chain
Reliant on outsourcing production. Highly responsive vertically integrated
supply chain
Role of store
manager
Deals with customers , employees Decision taking powers with respect to
stocking

Marketing
Ads 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 doesnt 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?



IT
DOS 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 doesnt 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



IT
Installation
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



IT
IT 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



IT
Need 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
30
7
75
419
0
50
100
150
200
250
300
350
400
450
MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE
SPAIN
48%
FRANCE
17%
GERMANY
5%
GREECE
6%
PORTUGAL
8%
UK
4% OTHERS
12%
NO. OF STORES
Majority of stores present in Europe
Highest concentration in Spain followed
by France
Ample room for growth exists within
Zaras 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
0
0.5
1
1.5
2
2.5
Inditex North American
Retailers
0
0.5
1
1.5
2
2.5
3
Inditex North American
Retailers
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 Euros
Year 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 gradation
Particulars Cost (in Euros)
Operating System cost (windows) 4,51,350
Hardware cost 28,83,330
Connectivity cost 1,27,440
Installation charges 42,48,000
Programming cost 6,00,000
Total cost 83,10,120
Break up of costs
Onetime costs 81,82,680
Recurring 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

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