Information System Used by Zara, a Fashion Retailer - Case Study Example

Report On Information System Used by Z A R A, A Fashion Retailer Executive Summary A research on the use of Information Systems in Zara, a Spanish Fashion clothing company, in the supply chain industry was undertaken. The research has been done using secondary data along with the official websites of the company. It was found that use of real time data gives it an edge over competition while reducing its lead time and increasing profitability. Certain recommendations for improvement on the existing system have also been made. Contents 1. Introduction 4 2. Methodology 5 3. Findings 6 4. Conclusion 9 References 10 Introduction Every aspect of management today requires information on which to build the organization. Nothing moves without information but mere information is not power. The right dissemination and application of information is power. Accordingly, the conversion of data from internal and external sources into information is called Information Systems. This is also known as Information Management and is typically computer based. It helps in enhancing the decision making process, enhances the operations, helps in overall growth of the company. It includes hardware, software, people, communication system, and the data itself. Information Systems can be used in any type of company be it manufacturing, retailing, or the service industry. This report analyzes the use of IS in the supply chain management. Supply chain management involves getting the right things at the places at the right time for maximum profit. Zara, a leading Spanish Fashion clothing company, is a classic example of having an unorthodox and cutting edge approach in the supply chain management. To cater to the changing demands of the customers, some manufacturers take care of management of supply and distribution in addition to designing. Zara is one such company, which has retained direct control over the entire process. Today Zara has attained the distinction of being a global brand having its presence in 60 countries with over 858 retail shops in big cities of the world (Inditex). It has made the best use of the resources and achieved the current position. They apply the “sense and respond” business model in this supply chain management. They react immediately because they have direct access to demand data. They base their product design and development on the demand data collected from the POS or the POS data mining technology. Information from their stores is constantly transmitted to the team of 200 designers. This gives them a competitive edge as far as customer satisfaction is concerned. Zara works at the pace of the society (Zara). This report would examine how effectively Zara uses Information System to enhance it management of operations. Operations include all the elements like designing, production, packing, distribution and finally sales. Methodology The research was carried out to find how exactly Zara uses IS in its operations. How does this give it an edge over its competitors and what improvements can be brought about with further investments in IS. This paper will present the optimal solutions under the market and manufacturing conditions without disturbing Zara’s base decisions. The research involved the use of secondary data as no primary data was available. However, after scrutiny of secondary data appeared to be sufficient and no primary data was needed. The research involved extensive reading of the published journal articles and internet research. The company’s website however did not provide much detail about its operations. Most of the data was gathered from other reports and websites. Research reports by the Deloitte Consulting group and Accenture have been studied in detail. Reports on how supply chain companies can integrate IS have also been researched. Most of the reports quote Zara as an example employing this exclusive business model. Analysis of the various reports by reputed consulting groups helped reach the conclusion that information can only be valuable if utilized at the right time in the right way. All the literature reviewed serves as a basis to observe the way Zara uses the Information System to its advantage. However, the research has limitations as no primary data was available. Various experts base it all on the research and their own interpretations. Findings and Analysis The success of IS implementation lies in proper planning and user involvement. A study of various papers revealed that Zara uses all the data on a daily basis and not on a monthly or weekly basis as do its competitors. It was found that Zara uses IS for planning, sourcing, manufacturing and delivery. Two supporting technologies in globalization have been used – data mining and data warehousing. Its data warehouse consists of only current data from present sources. It does not utilize past data to predict demand. It uses data mining for trend analysis. Merely obtaining the data is not sufficient. This information has to be shared effectively with all the partners in the supply chain. The most important information from the important sources has to be identified and tested to improve the performance of the supply chain (Lakervi & Kaipia). All the information need not be shared but the information that is shared should be meaningful. Zara, according to them has been successfully integrating the demand data into its operations across various stages in its supply chain. It uses the proprietary information technology to shorten the production cycle. To identify a new trend, produce and deliver, it takes just a few weeks against the industry average of nine months to a year (wipo). This is possible because it receives constant messages from the store managers who signal the new trends, fabrics and cuts. The fabric once selected is cut with automated facility and sent to the workshop. Its distribution system too is remarkable as it uses only air, chutes and its own transport. Within 48 hours, the materials reach the stores. Accenture, a consulting group, analyzed the Supply Chain Mastery. They discovered while operating models vary significantly from industry to industry, they always incorporate world-class business processes. According to them Zara uses proprietary information system to connect its stores to its headquarters. Zara employs specially designed hand-held devices or PDAs at all its stores, which facilitates rapid and accurate exchange of market data. Through this they keep track of the total order fulfillment process – plan procurement and production requirements, monitor warehouse inventories, allocate production to various factories and other suppliers, keep track of shortages and oversupplies (Ferdows et al). The managers use the hand held device to send customer feed back to the 200 odd in-house designers. This keeps the production group and the designers abreast of the latest trends and changing customer demands. This operating model of using the Information system helps Zara to respond to changing customer preferences ahead of its competitors. The shop managers use handsets to inform the designers at the end of the day on what has been sold and what has not. This helps the designers to assess the trend and make changes accordingly. What further adds to their information system is that all operations are carried on in one single hall- from the designers, to the planning and procurement staff who decide on the product mix, the prototype shop and those responsible for deliveries (Ferdows, 2004). (Ferdows) The operations become smooth because this enables focused communication between designers, production, sales and distribution groups. Communication is the essence here as the information collected is shared to take decision and improve performance. Data warehousing is effectively used here. Zara employs only current data and does not believe in demand forecasts. They calculate real time demands and keep their product line ready accordingly. In a typical garment supply chain company four steps are required to replenish stocks while Zara completes the process in just two steps. As the POS data is transferred regularly, the role of warehouse is eliminated. It uses its distribution centre as the pivot point and does not need to store the goods due to the fast turnover. The lead-time is shortened because of the compression in the flow of information (Lo et al). Zara also use the internet to collect information on the changing tastes and needs of the customers (Deloitte). The research suggests that this information would have been of no use to the company had it not taken complete control over the supply chain. The Deloitte report discusses the digital loyalty network that has been created by companies who link their supply chain and customer relationship management activities. They are linked through the digital or information technology and the network links all the operations, which results in higher customer loyalty and profitability. From all of the various reports and researches it can thus be analyzed that not only are Zara’s operations smooth, but it derives various benefits. Firstly, Zara has the required resources or the capabilities to exploit the oppurtunities and move ahead with its unique strategy. It maintains tight control over the production process, while keeping design and manufacturing in-house. Currently, Zara maintains 80% of its production processes in Europe, 50% in Spain, which is very close to its headquarters (Slashdoc). They have strategic agreements with the local manufacturers, which helps to maintain flexibility. Customers too have been trained to visit often as fresh stocks arrive frequently and never restocked. The feeling of scarcity urges the customers to visit more often and it has been found that against an average of 4 visits per year to other stores, customers visit Zara stores 17 times every year. Consequently, their advertising budget is very low. It spends much less on advertising than its rivals and its distribution system helps keep its inventory low. Secondly, the key to profit growth is intensive research into what the customer wants and faster rotation of products. They can do this because of their upto date Information System. Competition thus becomes irrelevant. The management follows the vertically integrated business model keeping all the three processes under its control. Thirdly, because of frequent design changes and limited production on any design, not only do they bring exclusivity to the client, they have to offer fewer discounts, have practically no ‘left-over’ stocks. With a short-lead time and high turnover, they manage to increase the frequency of the customers. They have low inventory levels, cash flow is better, less capital blocked. Another benefit of frequent design changes is that Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry. This has been possible because Zara allows the retailers to adjust 40 to 50% of their orders once the season starts while the industry practice is not more than 20%. The Information System further helps in minimizing bureaucracy, speedier decisions, shortening the delays, lessening the impact of changes in circumstances (Strategic Direction). The risk is minimum as there is no over production. Zara does not utilize 100% capacity, as this would leave no scope to react to changing demands of the customers. It hardly has any sales returns and enjoys higher profits than competitors enjoy. The company’s abilities to introduce three to four new product lines every fashion season allows it to charge a higher price (Deloitte). In the supply chain industry, Zara is one such company, which has been able to integrate the demand with supply. Customer focus is the key to their success. Conclusion Zara has been able to effectively use information system to enhance all areas of its operations right from production to sales and distribution. While Zara is a pioneer in supply chain management and effectively used Information System to enhance its performance, as the Deloitte report suggests, untapped oppurtunities are immense even for leaders. Zara can enhance the IS further so that the production department can assess what items are fast moving, including the color and fabric. The shop managers can inform of fresh designs or suggestions but the sale can be monitored through the production department, which can directly download the daily record of sales. They can thus determine the ideal inventory based on past sales of style and color. At the moment, store managers manually assess their inventory and there is room for improvement (SlashDoc). Manpower resource is wasted as the managers are occupied with administrative task. This can be done through remote computers at the production end. They can keep a track of what sells and what does not while the managers can concentrate on the new customer demands. Such arrangement would help speed up information and better utilization. New software could be used to automatically update the POS terminals for every sale that is made which would prove useful not only at the store level, but throughout the entire supply chain (SlashDoc). With this, manual sales would not have to be tallied as the inventory can be available through any POS terminal in the store. Pressure on the employees and store managers could be reduced due to this. If all employees use the same system and remain connected, it would promote togetherness and community feeling amongst them. References: Accenture, Creating and Sustaining High-Performance Business, 28 February 2006 Deloitte Research, Consumer Business, Digital Loyalty Networks, 1 March 2006 Ferdows K (2004), Going After the "Soft $3", Melbourne Business School, 28 February 2006 Ferdows K, Lewis M & Machuca A.D.J, Zara, 2nd February 2006 Inditex, 1 March 2006 Lakervi H & Kaipia R, Information sharing in Supply Chains, 28 February 2006 Lo L .W. J, Rabenasolo B & Jolly-Desodt A-M, Levaraging Speed as a Competitive Advantage, A case study of an International fashion Chain and its competitors, Fashion Net, < http://www.fashionnet.org/upload/sub/docs/8b.pdf> 2 March 2006 Radjou N, Kilgore S S, Orlov L M, Porth M & Hudson R (2002), Demand Forecasting Done Right, The TechStrategy Report, 28 FEBRUARY 2006 Slashdoc, Zara: Should they change their IT infrastructure to remain sustainable? < http://www.slashdoc.com/documents/49095> 1 March 2006 Strategic Direction, How Zara fashions its supply chain, Strategic Direction; Volume: 21 Issue: 10; 2005 General review Wipo Magazine May-June 2005,Intellectual Property in the fashion Industry, 28 February 2006 Zara, 28 February 2006 Read More