Zara A Business Overview With IT Recommendations - Research Paper Example

?Running Head: CASE STUDY Zara: A Business Overview With IT Recommendations Zara is a company that has inspired other clothing retailers to follow their business model because of the success that they have experienced. Through a system that provides fashions to stores within a three week time period, the clothing is designed with short life expectancy that lasts about as long as a current trend. The way in which the company is designed supports a great deal of IT support, however, the IT that is currently being used is now out of date and the company is in danger of losing access to the necessary hardware it needs to operate. The operating system is out of date and may no longer be made by the manufacturer. Therefore, Zara is in need of an update that will provide the company with a more solid foundation from which to find continued success. Zara: A Business Overview With IT Recommendations Case study Zara is a clothing manufacturer and retailer that has taken a unique and highly successful approach to their creation, delivery and sales. Zara is a subsidiary of Inditex and is based out of Spain, having been founded by Amancio Ortega with over 800 stores worldwide. The success of the store has led to some amazing achievements, including the launch of a 20,000 square feet outlet in Dublin, Ireland (Hines & Bruce, 2007, p. 247). The business model has embraced the idea of the disposability in combination with the speed at which trends shift, creating a system that delivers clothing to the stores in the quickest possible ways with volume created through a large number of styles with few of each style created. From the design room to the floor will average five weeks of production with a two week turnaround when a style is redesigned. The target markets for the retailer is women, men, and children - basically covering everyone who needs to wear clothing (Dickens, 2007, p. 267). Zara approaches their business model by equating clothing to food and giving it an expiration date. Through the way in which they designs are created, Zara has appeal to a broad variety of demographics with the designs crossing age boundaries and style boundaries, servicing the greatest number of people possible. The clothing was “not designed and manufactured to be highly durable; they were described as ‘clothes to be worn ten times’” (Through having a large number of styles and limiting the production runs on those styles, the theory is that one of the styles available will appeal to the consumer. In addition, through the limited number of each style and the high turnover, consumers feel encouraged to visit the store frequently. The profit margin is low on each garment, but because of the volume, the overall profit is high. In continuing the idea that the clothing is like food, the style can become stale, thus creating a short shelf life for each design. According to Dutta (2002), Zara changes its stock twice per week so that what is in the store is always new and fresh. Speed is the key to the model that Zara has been designed around. The first way in which the company creates quick turnover of its fashions is by having their manufacturing plants in Europe as opposed to Asia or Africa where the wages for workers would be lower. However, Zara considers the advantage of speed more important than the savings that would be seen from plants that were in lower wage countries. The salaries in Spain average around 2000 Euro per month, where in Asia the same worker would be paid around 300 Euro. Money is saved in shipping and in time, so the offset is considered worth the differences (Capell, 2008). An example of the problems that are solved by having plants near the outlets can be seen by the unusually warm autumn of 2003 when warmer clothing was not selling very well. While other companies were having problems with high levels of stock that was sitting on the shelves, Zara was able to quickly reposition its inventory and create new designs that were more appropriate to the weather (Tiplady, 2006). Goals and strategy If one word were used to describe the strategy that Zara has used it would be control. Through control of all aspects of the product production, Zara creates a tight organization of product distribution so that the designs that it has created can be quickly put into the hands of the consumer and changed on the shelves at a speed that encourages higher levels of consumer activity. Part of the way in which the company asserts control is in paying their sales representatives on a commission basis with up to 70% of sales associate pay being based on sales performance (Capell, 2008). Therefore, through each aspect of production, including the location of the manufacturing plants to the incentives that the employees are given, control provides the foundation for how the company creates high levels of profit through volume. Through technological innovation, Zara has created a system that provides for the way in which the design, delivery and sale of the products is managed. Inventory control is tightly watched and managed through handheld devices that the floor sales associates carry that provide immediate information to the designers who can turn around new merchandise made according to the information from the floor (McEachern, 2009, p 246). This type of information provides context for new design, creating consumer responsive actions in product provision. Because of these types of policies and uses of technologies, much of the industry standards and expectations of loss are much lower for Zara. Most of the retail clothing industry sees a loss of 37% in floor markdowns where Zara only sees about an 18% markdown rate on the floor. They provide 20,000 different styles per year to their stores, creating high volume, low leftover inventory rates through small runs on each style (Dutta 2002). Operations of the product replenishment process was strictly defined. Twice per week stores have to place an order for merchandise with the company. The managers took a look at what was left in the store, what had sold well, and a product list of what was newly available. About a day before their order is due, the store receives an order form that includes the a product sheet of what is available to the store, each sheet having been individually created through the information that was available from their inventory. The next operation involved two points of operational interest: the aggregate orders and the supply of inventory. At this point, supply and demand became the critical theory under which decisions would be made. The supply of clothing would determine whether or not all orders could be completely fulfilled. Decisions were made about which clothing would do the best in each market, and was then allotted according to these calculations. Because of the speed of the delivery system, clothes would find their way into the stores within a day or two of having been ordered (Zara 6). Vertically integrated manufacturing practices has provided for the speed at which the company model demands for product handling. Because of this type of manufacturing model, long-range forecasting was virtually eliminated as a gamble for their company. With a new design taking an average of three weeks to make it onto the store shelves, new ideas were not six months old, but only weeks old by the time they hit the shelves (Zara 6). Through the integrated systems and the way in which the manufacturing was so intensely connected to the sales of clothing, Zara has managed to take flexibility into a real world model so that the nature of consumer trends can be bent and manipulated to create the highest available profit. Zara uses long term thinking in order to implement short term processing which provides for an overall success in their business model. Problems in processes and operations One of the problems with the operation is that the inventory in each store is a ‘theoretical inventory’, built upon the expected stock that has been calculated from sales. Likewise, the manufacture of clothing is not done through a system of precise plans and schedules. The applications used are simple, creating a system that is imprecise on determining what is and isn’t needed through production values. The manufacturing of the clothing, however, uses highly sophisticated machinery that makes precision produced clothing through high volume methods. The clothing is distributed through automated systems that bundle and ship the items to the designated outlets. While the system has been fairly successful, there is still room for error since the computerized system is not designed for precision, but for volumes of work. The PDA system was introduced in 1995 where handheld devices were put into the hands of workers in order to provide up to the minute information that could be calculated into business strategy. However, the PDAs are beginning to reveal their age as technologies have developed that have outpaced theses devices. While the intent of the machines is to provide up to the minute information, in reality they are not all connected to the headquarters. Therefore, in truth, the information was all uploaded into one unit that then forwarded the information on a daily basis. While the model provided for immediate interaction, the technology still had not met that goal. As well, the stores could not communicate with each other about inventory, so using the handhelds to discover whether or not another store had an item was not possible (Zara). One of the more tangible problems with the PDA systems was that the vendor for the hardware for the terminals within the company was currently making systems that supported the DOS operating system, but this was not necessarily going to be the way of the future. The contract that they had with the hardware vender did not include an guarantee that they would continue making compatible systems, therefore, any changes by the vender would affect the use of their current technologies. In discussing upgrades, this problem was one of the more concrete issues that needed to be addressed. In addition, their were problems included a series of desired upgrades that had been requested by managers for problems that existed in the use of the PDA. One such problem was within the return system with which managers expressed great dissatisfaction. Firm-based value chain model Porter’s firm based value chain model is a for the management of products (Appendix 2). Through a chain of activities, products are given increased value. The process is undertaken with the idea that through creating a unique system in processing the product, competition can be exceeded. According to Hax and Wilde (2001), “The message of the value chain model to managers is that they must achieve sustainable advantage by beating their competitors in as many key activities as possible” (p. 254). The use of the model allows for a company to have the advantage of assessing the position of a company in terms of product. The model divides the activities in the business into nine categories, five primary activities that are supported by four activities. The primary activities involve the movements of raw materials, finished products, and the marketing, sales, and service in regard to the product. The supporting activities are bound in the infrastructure, the management of the primary activities and the way in which it is facilitated (Hax & Wilde, 2001, p. 252). Model application Zara offers a very good example of how to implement the Porter value-chain model. The firm infrastructure has been specifically designed to accommodate the business model. The designers and manufacturers are in close enough proximity that speedy production is available. Human resource management is developed through interconnectivity through PDAs which provide technical support to the operations. One are that might be considered a problem, however, is through the current technologies that are being used. The PDA’s are outdated and have far less function than do Smartphones which are carried by most people at this time. Therefore, the technological aspect of the business needs to be upgraded. However, this side of the business is managed by an in-house IT team with a workforce of approximately 50 people who keep all IT functions running smoothly. Most of the applications are developed in house and are designed to specifically function for the company. Procurement of the product is within the control of the company. Products are manufactured by the company rather than outside resources, thus the product quality and control is within the hands of Zara. The company is not based on merchandising through buyers or through outside design firms, thus it is defined by its own choices in manufacturing. The only thing that must be provided is raw materials, which is set up to be purchased in bulk and according to basic needs of the manufacturing of goods. Color schemes and fabric print choices are predetermined, then used as needed for the manufacture of clothing that fits into the overall themes of each individual season (Capell, 2008). Implementation opportunity analysis At this point, the upgrading of the PDA system is essential towards creating a space within the current state of retail clothing sales. While the PDA system was efficient and relevant as innovative when it was implemented, it is now necessary to upgrade that system to bring it in line with current technologies. The applications that were created in house to be used specifically for the Zara stores no longer exceed the current available applications and the nature of quantifying areas of life has changed, thus creating a system that could represent a greater level of control than had been achieved before with the IT that was put in place originally. With the design of apps emerging as a high-level and public resource, Zara needs to use the new technologies to upgrade and better service its business model goals. Implementation effectiveness Zara has designed its IT department in much the same way it designed the rest of its operations. Rather than designating a head of IT operations, Zara developed a committee approach which provided an opportunity for the best ideas to come forward, rather than a focus on the decisions and ideas of one central head. The systems were designed through mutual decisions that brought about the best possible conclusions. The applications were designed in-house and provided support for the goals of the company without being overly designed or complicated with aspects that were not relevant to the needs of the company. The 50 people that worked in the IT department were divided by three categories: Solutions, Logistics Support, and Administrative Systems. Incidentally, only one person in ten years left the department, suggesting that the system was conducive to employee retention (Zara 8). Conclusions and recommendations While the system that Zara has created for clothing manufacture, distribution, and sales has been innovative and highly successful. However, the system needs to be looked at for IT solutions that will upgrade the system and bring the operating system into the 21st century. Because of the many advances that have been made, including the capacity for real time updates that are well within the capacity of current technologies to support. With the inaccuracies that are currently happening in regard to inventory remedied through upgraded technologies, a deeper sense of control can be defined. The danger of the DOS operating system becoming obsolete in the needed hardware that they get from an outside source, it is imperative to prepare for this eventuality through the examination of other resources that can support the needs of the business though new operating systems that are more common. The business model and value-chain model that has been used for Zara represent intelligent design for the long term profitability of the company. However, in order to best support these aspects of the company, real time information should be implemented. Because the advancements of technology now includes easy access to the internet through hand-held devices, there is no reason that upgrades to the system would not include real time capacities. In creating real time capacities, bar code readers that take a more accurate inventory, and perhaps credit card readers that handle transactions on the floor, similar to that which Apple uses in their stores, the company can once again reign over the in-store IT arena. There are a great number of advancements that can be put into an upgraded system that cannot be implemented in the current operating system. These changes will provide Zara with a well needed advantage. Illustrations Fig. 1. Porter’s Firm Based Value Chain Model. Found at http://en.wikipedia.org/wiki/ File:Porter_Value_Chain.png References Capell, K. (9 October 2008). Zara thrives by breaking all the rules Bloomberg Business Week. Retrieved from http://www.businessweek.com/magazine/content/08_42/b41 4066866245.htm Dutta, Devangshu. (2002). Retail @ the speed of fashion. PDF. Hax, A. C., & Wilde, D. L. (2001). The Delta project: Discovering new sources of profitability in a networked economy. Houndmills, Basingstoke, Hampshire: Palgrave. Hines, T., & Bruce, M. (2007). Fashion Marketing : Contemporary issues. Burlington: Elsevier. McEachern, W. A. (2009). Economics: A contemporary introduction. Mason, OH: South- Western Cengage Learning. Tiplady, R. (4 April 2006). Zara: Taking the lead in fast fashion. Bloomberg Business Week. Retrieved from http://www.businessweek.com/globalbiz/content/apr2006/gb200604 04_167078.htm Zara: IT for Fast Fashion. ( Appendix 1 Porter’s Firm Based Value Chain Model Fig. 1 Read More