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.

— José María Castellano Ríos, Inditex CEO

 Speed & Decision Making

• Zara needs to respond quickly to demands of

their young & fashion conscious customers
OVERVIEW • Fashion misses are very common as new styles
Speed & can appear very suddenly
Decision Making • 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 doesn’t second guess their
decisions
 Marketing, merchandising & advertising

• Very low spending on marketing while heavy

spending on stores
OVERVIEW • No ‘classics’ clothes but clothes with very
Marketing & short lifespan forcing customers to buy it on
the spot, visit stores often
Growth
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
 Ordering & fulfillment

• Manual inventory management based upon direct

observation & store manager judgment
• Use of PDA’s, Infrared, dial-up modem for order
management
• Process is complicated & divided in various steps such as
OVERVIEW breaking order into segments and beaming these segments
Manufacturing 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 commercial’s guess which need not be
accurate
 Information systems at La Coruna, factories, stores
& DC’s
• 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
OVERVIEW • Distribution center had largest automation with complete
tracking of SKU’s
Information
• Stores used PDA’s which communicate to La Coruna via
Systems modems
• PDA’s 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 Zara’s headquarters
• Transmission required copying into floppy disc & then sending
it using internet which happened at the end of theday
• No dialogue between PDA & POS inside store or between two
stores
 Conventional Business Model Zara’s Business Model
Reliant on outsourcing production. Highly responsive vertically integrated
Supply chain supply chain

Role of store Deals with customers , employees Decision taking powers with respect to
manager stocking
Ads primarily for publicizing the Ads only for yearly sales & announce new
Marketing assortment store inaugurations.(0.3% of revenue)

Design teams Design conceptualized by Small elite Dedicated teams for different segments. Ex:
team common for all segments. Women-Night Wear, Kids-Sports wear etc.

Product life span Generally apparel firms produced Short life span but increased launches of
CLASSIC clothes. new style clothing.
Average new launches per year:2000- Average new launches per year:11000
4000

Time to market Comparatively high due to outsourcing. As Zara is vertically integrated lead times as
Industry average is 6 months. 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 0.5% of revenue as in-house applications

outsourced to vendors were developed
“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”

DESIGN &
PRODUCTION TEAM

Factories
–
Dying & cutting
clothes

Commercials Commercials-
- Dedicated to 3 WEEKS Small Local
Store Product Departmentin
Shops
Managers stores
-
Sewing

DISTRIBUTION
CENTRE

2 DAYS

STORES
 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 doesn’t provide
any customer insights, real-time data or any advanced sales projections
• As Zara is getting bigger & bigger its operation are becoming more
complex
CURRENT • Hardware vendor may modify peripherals for POS so that they may not
run on ancient OS such as DOS
STATUS
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?
 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 decisionmaking
• Highly responsive vertically integrated supply chain reduces
need for long range sales forecast
IT • More dependant on market feedback from ‘commercials’ than
DOS based POS from customer data insights
• Believed in ‘manufacturing on fly’ rather than long range sales
forecast
• Zara doesn’t require theoretical inventory to be 100% accurate
• Low level of inventory in current scale of operation: Zara
stores maintained low inventory levels thus reducing needfor
smart inventory management
• Current scope of operations makes ordering & fulfillment
possible using DOS based POS
 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
IT • No need for separate maintenance crew for POS as employees
can do it by themselves
Installation
• 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 ratherthan
complicated applications due to its current scope of business
 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
IT • No cost benefit analysis or formal justification for IT efforts
IT Policy • 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
 Why do we need a new system
IT
• Zara is the only customer using DOS
Need for New
System • 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
 GEOGRAPIC DISTRIBUTION OF ZARA STORES

NO. OF STORES
450 419
UK
400 4% OTHERS
12%
350
PORTUGAL
300 8% SPAIN
TOTAL - 531
48%
250 GREECE
6%
200
GERMANY
FRANCE
150 5%
17%
100 75

50 30
7
0
MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE

• Majority of stores present in Europe

Increase in number of stores implies
• Highest concentration in Spain followed
increase in Data-Base size & need for
by France
real time data-base
• Ample room for growth exists within
Zara’s current markets
 Store -1
IT System Layout
PDA: 1

Current IT Layout • No communication between stores

PDA : 2 PDA: 3 • Unidirectional communication with
Modem

PDA- 1
Common Network

PDA-2 PDA-3
Store -2
Store -1 Modem
DC Factory
PDA: 1

PDA : 2 PDA: 3
• Communication between stores
possible
• Bi-directional communication with
PDA- 1
Modem

PDA-2 PDA-3 New IT Layout

Store -2
 Trade off – New System IT Revenue (%)
2.5

IT Employee (%) of total 2

3 1.5
2.5 1
2
0.5
1.5
0
1
Inditex North American
0.5 Retailers
0
Inditex North American
Retailers
Efficiency
• Better inventory
Total investment (8.3 management
€ mn) • Inter-connected stores
• Cost of replacing existing •Real time customer
DOS systems insights
• One time cost • Trend analysis
(License, installation, hard
ware)
•Annual connectivity
charges
• Human resource for IT
 Order Fulfillment Process
Current Order Fulfillment Process
Segment 1
Store 1
(Men)
Offer received in Store
Segment 2
digital format Store 2 manager Combined Order
(Women)
from La Coruna (Infrared)
Segment 3
Store 3
(Kids)

Order is
generated & given
to La Coruna

New Order Fulfillment Process

Store 1

Order is
Store
Offer received in generated &
Store 2 manager
digital format given to La
from La Coruna Coruna

Store 3
 Financials in millions of Euros Total cost of up gradation
Particulars Cost (in Euros)
Year 2003 estimated 2002
Operating System cost (windows) 4,51,350
Net Operating Revenues 4,848 3,974.0
Hardware cost 28,83,330
Cost of Goods Sold 2,368.3 1,954.9 Connectivity cost 1,27,440
Gross Margin 2,480.0 2,019.1 Installation charges 42,48,000
Operating Expenses 1,480.6 1,179.8 Programming cost 6,00,000
Annual operating cost 0.127 - Total cost 83,10,120
Break up of costs
Operating Profits 999.4 839.3
Onetime costs 81,82,680
Non-Operating Expenses 288.1 224.3
Recurring cost 1,27,440
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 • Recurring cost includes annual connectivity
charges
Net Income 483.9 438.1
• Rest of the costs are one time cost only
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
 Roadmap & Implementation
• Gathering and analyzing the requirements of the new system on the upgraded OS
• Proof of Concept for feasibility
Requirements • Selecting a migration method

• Identifying the resources and availability

• Prototyping, Designing & Implementing
Design & • Testing the new system
Implementation

• 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 • Migration of data from old system to the new system after the successful pilot run