ZARA Case

Background:

Zara is a clothing retail store for women, men and children, concentrating sixty percent of their effort to the women’s clothing market. Besides retailing, Zara also designs, produces, and ships their lines of clothing to their Zara stores. Zara’s corporate concept is to offer fashionable, trendy, designs at a reasonable price.   The key to their corporate success is to offer the latest trends and fashions before their competitors (H&M, Gap, and Benetton).   They believe that they are in the fashion business (not the clothing business per se) and as part of this corporate concept, try to hold very low levels of inventory, often having their entire inventory out on display, in order to sell out and make room for the next wave of fashion. Zara started out in 1979 with 6 stores and flourished to all major Spanish cities during the 1980′s.   Within the next decade, Zara’s parent company, Inditex, expanded to 29 countries across Europe, the Americas, and Asia.   Additionally, during this time Index acquired other big name fashion brands; each
operating independently of each other.   By 2002, Index had expanded to 1,284 stores in 39 countries.   Zara represents 75% of Inditex sales, and by 2003 Zara had 565 stores in 33 countries. Zara examined its IT infrastructure and determined that it may be beneficial to consider implementing a new upgraded POS system to create a more robust system that is responsive to Inditex’s supply chain network and also to remove the risk it currently is facing with the existing system becoming obsolete as their vendors move on to other systems that may no longer be DOS compatible.

 

Problem:

The problem in this case stems from a conversation between Salgado, the Head of IT for Inditex, and Sanchez, the technical leader for Zara’s POS System. Zara currently uses a Point of Sale system to run their business. Salgado thinks an upgraded system is necessary to remain competitive in terms of technology and the upgrades their hardware vendor is making which would no longer be DOS compatible. Sanchez thinks there is more risk involved in upgrading the system since it works just fine and has proven to be stable – he has the mind set of if it’s not broken don’t fix it. Sanchez also knows all of the ins and outs of the system and believes he can handle any issues that they face with it – both currently and in the future. Overall, the main problem Zara is facing is if they should or should not upgrade their system.

 

Situation Assessment:
Zara’s business model puts a great emphasis on speed and decentralized decision-making. They have no Chief Information Officer and follow no formal process when deciding on an IT budget or new IT projects. Zara employs a technology committee that Salgado and Sanchez both take part in. When this concern was raised in the past, the committee decided that it was best to write the applications required for the programs themselves in order to apply the unique concepts required by Zara. They were against purchasing commercially available software because of the uniqueness of their brand. The only commercial applications used are ones such as word processing and emails to ensure office productivity. Such applications that run the heart of the business include applications created to prepare offers and distribute it over the Internet to stores internationally and to receive orders from those stores, applications created to compare aggregate orders to available inventory for each SKU,  and applications created to track “theoretical inventory” in which shipments increase it and sales decrease it.

Another form of technology currently used by Zara are PDAs, which require POS terminals. PDA’s are used in-store by employees to order inventory, handle returns, and transmit information to other stores. Store managers and salespeople must initially determine necessary orders by counting garments as they walk around the store and communicate with one another. Inventory balances cannot be looked up on any in-store computers. Managers learn about new available garments through their PDA by linking it at the end of each day through a dial-up modem connecting it to an information system in La Coruna. When managing a new store opening, employees must insert new floppy drives into a blank POS terminal. Both the POS terminals and the PDAs are not always connected to headquarters or other stores; therefore, employees must copy daily sales totals from each terminal to floppy disks, carry the disk to the modem-equipped terminal, and complete the transition. POS terminals are a huge part of Zara’s business model and day-to-day functions, but Salgado and Sanchez both have valid concerns regarding the future of them. On one hand, if the hardware vendor does actually change its machines, Zara will be left without a system. The vendor has stated that Zara is his only customer using a more dated system. On the other hand, a new technology might prove to be overkill for the type of business Zara is running and in turn destabilize Zara’s easy and efficient existing system.

 

Alternatives:

1.     Do not change the system

One alternative as suggested by Sanchez is for Zara to leave the system as is. Zara has been able to run a successful, efficient, and productive business on POS terminals. The system has proven to be stable by running without many complications. Employees have also been able to use the system without additional IT service. By 2003, Inditex has opened 550 Zara stores internationally, with Zara accounting for a majority of its sales, all while operating on POS terminals. Any shift away from this system might prove to be an unnecessary risk, affecting the entire flow of the company. While keeping the same system, Zara can choose to purchase more POS terminals. Doing this would provide a safety-net for the company if they happen to lose the support of their vendor. Although the vendor has shown no desire to change the machines, being that Zara is its only customer using this system, they cannot be sure a change will not occur in the near future.

2.       Update POS to another system

The other alternative would be to completely update POS to another system such as Windows, UNIX, or Linux. This option would require a complete change to the company. Such a change would allow for new capabilities such as larger screens, keyboards, and mouse attachments, along with wireless networks. The new capabilities would satisfy some employee complaints and wireless networks would eliminate the need for floppy disks and allow for permanent Internet connection. The addition of wireless networks will also keep all stores connected to headquarters and allow for a quicker way to know all inventories. To upgrade their system Zara is looking at a significant cost for implementation and training. Being that Zara does not usually allocate a formal budget toward IT investments, this cost might appear high. Although significant costs might be incurred, Zara will no longer have to work with the POS vendor and can let go of the uncertainty that he might change his machines and leave them without an operating system at some point in the future (whether sooner or later). This option also allows Zara to remain technologically competitive as advances continue to occur and competitors advance along as well. This ensures Zara will not fall behind in efficiency and lose customers or momentum as a result.  

 

Recommendation:

This case provides a difficult set of alternatives to choose from. Deciding to leave the system as is might save Zara from incurring costs now, but it might prove to be a more costly decision in the future. On the other hand, upgrading their system now will require a significant investment, but may prevent significant costs in the future. I recommend that Zara upgrade their system. It is clear that technology is advancing quickly and although their system works fine now, it will not benefit them to remain with this same process as the end all. The familiarity of their current process will only keep them stable and efficient for the time being. At some point it will become even more outdated than it already is, forcing Zara to upgrade anyway. Upgrading to a new operating system now will allow them to prepare more adequately in order to handle the changes to come with the new process.