Zara IT for Fast Fashion - Essay Example

Case Study Zara: IT for Fast Fashion Table of Contents Table of Contents Case Study Zara: IT for Fast Fashion 4 Introduction 4 Criteria for Analysis 5 Application of Theory 5 Firm-Based-Value Chain Model 5 Implementation Opportunity Analysis 6 Evaluation of the IS Implementation 7 Results 8 Quantitative Costs Analysis of the Current System 8 Future System 9 Qualitative Costs Analysis of the Current System 9 Future System 10 Conclusions 10 Recommendations 10 Executive Summary The case study focuses on Inditex, Spanish retail giant, and the manner in which its largest retail chain, Zara, has been successful. The success is due to its flexibility, excellent fashions and application of a simple business model. As of 2002, Inditex had six separate distribution chains; Zara, Stradivarious, Oysho, pull and bear, Bershka and Massimo Dutti (Thomas, 2006). Zara stands out as the largest, most profitable and internalised chain among all others. The case study stipulates that head of the IT department, Salgado, is destined to decide whether to upgrade the IT capabilities and infrastructure for the retailers or retain the traditional system. The case study indicates that the company relies on an outdated operating system for the store terminals and lacks readily available network across all the stores. The dilemma that the management is grappling with is determining whether they should upgrade the present system and loose the reliability that characterises the current system or proceed with the current DOS-based system that is devoid of compatibility to the future improvements. Case Study Zara: IT for Fast Fashion Introduction The case study focuses on Zara, the largest retail chain for Inditex, Spanish retail giant, and the manner in which it has been successful due to its flexibility, excellent fashions and application of a simple business model (McAfee, Dessain and Sjoman, 2007). The head of the IT department in the company, Salgado, is grappling with a dilemma on whether to upgrade the IT capabilities and infrastructure for the retailers or retain the current system. The case study indicates that the company relies on an outdated operating system (OS) for the store terminals and lacks readily available network across all the stores. The Microsoft Disk Operating System (MS-DOS) seems to be working well as no major challenges have been witnessed in the course of its long time use. One of the major concerns expressed by Salgado in the long run is that Zara Point of Sale (POS) is running on MS-DOS that is not supported by Microsoft Inc. According to Capell (2008), DOS has been replaced by Windows since 2001, the same time that Microsoft Inc stopped supporting DOS. This implies that a long term information technology strategy is inexistent. Zara lacks a formal system that can be applied in planning and predicting the future needs, that includes the operational and the future expenses. Another issue highlighted by the case study include lack of a centralised distribution system and incapability of sharing the inventory among the chain stores. Zara lacks an efficient system that can allow managers to check their inventory balances for the stores they manage or other stores they transact business with. They normally achieve this through a tiresome and inefficient travelling from one store to another. Another issue that the case study highlights is the reliance of the company on one person for the provision of knowledge as well as ideas. Dependence on one person is risky to the whole system. Criteria for Analysis The paper’s objective is to discuss whether the company management should upgrade the current DOS/IT infrastructure and evaluate the possible impacts of the upgrade. The Michael Porter’s value chain analysis will be applied in understanding Zara’s business model and identify the areas where the Information Stems (IS) can add value to the system. The analysis will also present opportunities for IS implementation and evaluate its effectiveness. The analysis will lead to conclusions and recommendations for improving the current OS. Application of Theory To understand the problems being faced by Zara, Porter’s five forces will be used in reviewing the primary and secondary activities. Firm-Based-Value Chain Model According to Kroenke (2012), the survivability of a business firm such as Zara, depends on its effectiveness of performing the primary activities. The primary activities undertaken by Zara include ordering, design, manufacturing, fulfilment, distribution, and storage. Support activities include administration and systems, procurement and business support units. The primary activities changes with the changes in the model although the support activities remains constant. The company has maintained its competitiveness through the addition of value in all business activities i.e. starting from manufacturing to distribution. The decision-making process in Zara is decentralised whereby every manager is provided with the autonomy to select the inventories for their stores. The distribution centres manage the inbound logistics of receiving, storing and inventory control of the input materials. Additionally, the company has reduced inventory risks because its does not stock the inventories (Gallien et al., 2012). The existence of the internal IT department has assisted the company in reducing the overhead costs related to storage, logistics and administration, thus; developing a cost advantage. Figure 1: Application Of The Porter’s Model In Zara Company Implementation Opportunity Analysis Zara has applied the information technology in both functional and decision roles. The business model indicated by the case study uses the POS terminals and is run on DOS operating System. According to McAfee et al., (2007), the company also uses the Personal Digital Assistants (PDA) for ordering tasks such as transmission of the information from headquarters to all stores. Closer analysis of Figure 1 shows that the company can improve its primary activities through incorporation of IT in its business activities. Primary activities such as ordering, design, fulfilment and manufacturing are inefficient due to the use of the outdated operating system (Garro, 2011). The presence and use of PDAs leads to redundancy. The presence of the POS terminals causes difficulties in checking the in-store inventories, share information and check the inventories from other stores. The store managers are also forced to make telephone calls when making inquiries; which is time consuming and expensive. Zara does not apply internet in marketing. The website is underutilised, with minimal use of the IT. According to the case study, the art of decision making is also decentralised, with the managers tasked with making most of the decisions related to the business activities (McAfee, Dessain and Sjoman (2007: 3). The case study also indicates that Zara relies on the word of mouth marketing rather than online advertising in promotion. These are some of the area that require improvements through proper application of information technology as well as IS infrastructure. Although the present system applied by Zara has been efficient, the current change in the information technology makes the upgrade unavoidable. Zara stands a better chance of improving its value chain operations through incorporation of the IT and IS technology in its structures. Evaluation of the IS Implementation Figure 2: Model the value chain and how Information Systems support it According to the case study, Zara makes minimal use and investment in IT. This is meant to cut down costs. The 2002 IT budget figures by Castellano were estimated to be 0.5% of the total revenue, compared to the 2% minimum from other competitors (McAfee et al., 2007: 8). The IT efforts lack cost benefit analysis because there is no formal justification of their benefit. The most eminent consideration when undertaking an IS upgrade should be maintaining the business competitiveness. The company’s competitiveness is due to its adaptive capability in responding to changes in market forces. Zara should compare both the quantitative and qualitative benefits of the new and old systems before deciding to make any changes. Results Quantitative Costs Analysis of the Current System The vertically integrated system of operations applied by the chain reduces costs. Zara also uses POS terminals that are controlled by the DOS that is cost-effective as the system requires minimal maintenance. The presence of an IT department enables Zara to develop the DOS compatible software instead of incurring losses related to purchasing new ones. The IT department is handled by cost-effective workforce i.e. 0.5% of the total workforce (McAfee, 2004). The distribution chain also upgraded the use of fax in ordering to PDAs, to curtail the high costs and time wastage associated with fax use. However, lack of interconnection leads to inconveniences due to high costs and time wastage resulting from phone calls applied in the management of the inventories. However, complete evaluation is not possible because specific comparative data is not provided by the case study. Future System Installation of the new OS such as Windows or Linux will enhance the development of capabilities within the company. According to McAfee et al (2004), Linux offers the cheapest form of OS because it does not have a one time license cost. However, Linux possesses higher ongoing costs such as contract service costs although its costs depend on the skills of the employees in the IT department. Zara should also consider the cost of each OS as installation will be undertaken in a large number of computers. Zara will be required to upgrade its systems through installation of new hardware as well as replacing the old terminals. Qualitative Costs Analysis of the Current System The competitive advantage possessed by the current system is a product of the efficient supply chain adopted by the company and its fast response to the changing marketing environment and not the application of the IT advantage (Panká, 2005). However, sustainability of its competitive advantage is threatened due to the chain’s low investment in IT. Use of the outdated and inefficient system hampers the company growth through limiting the dissemination of business information. Lack of support of the outdated DOS by Microsoft implies that any future plans may be risky. The low number of employees in the IT department leads to overworking. The current system is also inefficient in matching inventories as it cannot predict sales, plan or estimate losses. Lack of interconnectivity makes inventory management difficult as making calls is less productive and time consuming. The company’s decision to retain the old system in the rapidly changing IT environment affects its effectiveness and taints its corporate image. Future System Transforming the system will require training of employees. However, the company should be prepared to experience difficulties related to inertia as the employees struggle to adapt to the new system. Introduction of the new system will assist in nurturing the future inventions although the adaption period required will lead to low productivity. The employees may also face problems related to incompatible software, faulty hardware and stress related to updating of the new equipments. The current culture of the company is decentralised and informal (Ferdows, Lewis and Machuca, 2003). Any changes that increase the number of tasks may erode the creativity and autonomy of the work force with time. Conclusions Zara has maintained a higher marketing advantage over its competitors due to its response to the changing marketing trends as well as vertical integration. Its current IT infrastructure has enabled the company to be effective and consistent with its core business. The cost analysis of the tangible and intangible benefits outweighs the costs involved. Therefore, Zara should consider upgrading the current OS with the new one. Although the initial costs involved will be high due to onetime charge, the maintenance costs will be reasonable because they will be distributed in the long run. The changes should be implemented gradually to negate the risk of sudden setbacks associated with implementing change abruptly. Recommendations Zara should implement the changes gradually to ensure success. There is no need for Zara to implement new changes in the short run as the changes can only be successful and beneficial if implemented carefully and cautiously over a sufficient period of time. For Zara to maintain competitiveness, a strategy for change should be formulated before any changes are undertaken. Zara should halt application of the current system and conduct a pilot test for the new system to affirm its effectiveness. A detailed sequential budget for the upgrade should be prepared instead of investing at a time. The company should also change the informal and decentralised form of decision making into a formal one. Zara should also upgrade the current incompatible POS terminals with the more modern and compatible OS such as Linux or windows. The inconvenient PDAs used for ordering should be replaced with more convenient forms such as personal computers. The interconnectivity challenges faced by Zara can be resolved through switching from modem-based to broad-band based network (Lopez and Fan, 2009). Zara should also focus on developing the IT department through hiring a new CIO who stands a better chance of tackling the IT related problems and facilitate ambitious developments. The company should also focus on online marketing and take advantage of social media to promote itself. References Capell, K. (2008) ‘Zara thrives by breaking all rules’ Business Week, no. 4104, p. 66. Ferdows, K., Lewis, M. & Machuca, J.A.D. (2003) ‘Zara Supply Chain Forum’ International Journal, vol. 4, no. 2, pp. 62-66. Gallien, J., Graves, S.C. & Tatiana, B. (2012) Demand forecast for short life cycle products: Zara case study, Massachusetts Institute of Technology. Garro, A. (2011) New product demand forecasting and distribution optimisation: a case study at Zara, Massachusetts Institute of Technology. Kroenke, D.M. (2012) Experiencing MIS in organisational strategy, information systems, and competitive advantage Upper Saddle River, NJ: Pearson Education, Inc. P. 51. Lopez, C. & Fan, Y. (2009) ‘Internationalisation of the Spanish fashion brand Zara’ Journal of Fashion Marketing and Management, vol. 13, no. 2, pp. 279-296. McAfee, A. (2004) ‘Do you have too much IT?’ MIT Sloan Management Review, vol. 45, no. 3, pp. 18-22. McAfee, A., Dessain, V. & Sjoman, A. (2007) ‘Zara: IT for Fast Fashion’ Harvard Business School, pp. 1-23. Panká, G. (2005) ZARA: Fast fashion, Boston, Mass, Harvard Business School Pub. Corp. Thomas, R.J. (2006) ‘Uncovering Zara’ Apparel Magazine, vol. 47, no. 5, p. 27. Read More