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8/11/2019 Zaraitfinal Edit1 120826055208 Phpapp01

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OVERVIEWZara Philosophy

The original business idea was very simple. Link

customer demand to manufacturing, and link

manufacturing to distribution. That is the ideawe still live by.

Jos Mara Castellano Ros, Inditex CEO


3/20

OVERVIEWSpeed &

Decision Making

Speed & Decision Making

Zara needs to respond quickly to demands oftheir young & fashion conscious customers

Fashion misses are very common as new stylescan appear very suddenly

Store managers have more authority than otherstores such as deciding the garment to be put onsale

Commercials decide which garments to beproduced & sold

Have great deal of autonomy as highermanagement doesnt second guess theirdecisions


4/20

OVERVIEWMarketing &

Growth

Marketing, merchandising & advertising

Very low spending on marketing while heavyspending on stores

No classics clothes but clothes with veryshort lifespan forcing customers to buy it on

the spot, visit stores often

Growth Opportunities

Currently 550 ZARA stores part of Inditexchain

Huge growth opportunities in Italy & westernEuropean market

Hence there is need for new production &distribution network


5/20

OVERVIEWManufacturing

Ordering & fulfillment

Manual inventory management based upon direct

observation & store manager judgment Use of PDAs, Infrared, dial-up modem for order

management

Process is complicated & divided in various steps such asbreaking order into segments and beaming these segmentsto concerned person who then filled up their part

Design & manufacturing

Maximum time from conception to distribution centre isthree weeks

Vertically integrated supply chain ensured constantintroduction of new items with short lead times

Based upon commercials guess which need not beaccurate


6/20

OVERVIEWInformation

Systems

Information systems at La Coruna, factories, stores& DCs

Several information systems are used to prepare orders,distribute them over internets & collect them

Factories had simple applications which provided informationabout order & due dates

Distribution center had largest automation with completetracking of SKUs

Stores used PDAs which communicate to La Coruna viamodems

PDAs 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 Zaras headquarters Transmission required copying into floppy disc & then sending

it using internet which happened at the end of the day

No dialogue between PDA & POS inside store or between twostores


7/20

Conventional Business Model Zaras Business Model

Supply chain

Reliant on outsourcing production. Highly responsive vertically integrated

supply chain

Role of store

manager

Deals with customers , employees Decision taking powers with respect to

stocking

Marketing

Ads primarily for publicizing the

assortment

Ads only for yearly sales & announce new

store inaugurations.(0.3% of revenue)

Design teams Design conceptualized by Small elite

team common for all segments.

Dedicated teams for different segments. Ex:

Women-Night Wear, Kids-Sports wear etc.

Product life span Generally apparel firms produced

CLASSIC clothes.

Average new launches per year:2000-

4000

Short life span but increased launches of

new style clothing.

Average new launches per year:11000

Time to market Comparatively high due to outsourcing.

Industry average is 6 months.

As Zara is vertically integrated lead times as

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 areoutsourced to vendors

0.5% of revenue as in-house applicationswere developed


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STORES

DISTRIBUTION

CENTRE

DESIGN &

PRODUCTION TEAM

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

Commercials-

Dedicated to

Department in

stores

Commercials

-

Store ProductManagers

Factories

Dying & cutting

clothes

Small Local

Shops-

Sewing

2 DAYS

3 WEEKS


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10/20

CURRENT

STATUS

Current Status

Zara currently uses POS system based upon DOS which is very easy touse & working fine for them

This system does all the basic operations of billing but doesnt provideany customer insights, real-time data or any advanced sales projections

As Zara is getting bigger & bigger its operation are becoming morecomplex

Hardware vendor may modify peripherals for POS so that they may notrun on ancient OS such as DOS

Dilemna

Shall they let go of DOS which is working great for them & migrate tomodern OS such as Windows, Linux?

If they are not migrating to new OS then should they stock up oncurrent 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 sothat it can have network across the stores & within the company?


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ITDOS based POS

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 decision making

Highly responsive vertically integrated supply chain reducesneed for long range sales forecast

More dependant on market feedback from commercials than

from customer data insights

Believed in manufacturing on fly rather than long range salesforecast

Zara doesnt require theoretical inventory to be 100% accurate

Low level of inventory in current scale of operation: Zarastores maintained low inventory levels thus reducing need forsmart inventory management

Current scope of operations makes ordering & fulfillmentpossible using DOS based POS


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ITInstallation

Easy installation & ease of operation

Use of DOS based POS is very user friendly, stable & easy tomaintain

Layman like store employee can switch on system & set upentire POS architecture

Complete software installation does the trick in the event ofserious software malfunction

No need for separate maintenance crew for POS as employeescan do it by themselves

Ease of customization on POS: Zara operated in variousgeographies & currencies which necessitates need ofcustomization

It is very easy to customise & write their own softwares onDOS based POS

Majority of complex operations such as sewing, dying wereoutsourced by Zara

Hence factories required simple applications rather thancomplicated applications due to its current scope of business


13/20

ITIT Policy

Zara approach to IT policy

Comparatively low spending on IT (0.5% of revenue) ascompared to industry average (2% of revenue)

No separate IT department, all decisions related to IT

applications taken directly by top management

No cost benefit analysis or formal justification for IT efforts

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


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ITNeed for New

System

Why do we need a new system

Zara is the only customer using DOS

Hardware vendor might upgrade their machines which arenot 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


15/20

TOTAL - 531

307

75

419

0

50

100

150

200

250

300

350

400

450

MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE

SPAIN

48%

FRANCE

17%

GERMANY

5%

GREECE

6%

PORTUGAL

8%

UK

4% OTHERS

12%

NO. OF STORES

Majority of stores present in Europe

Highest concentration in Spain followedby France

Ample room for growth exists within

Zaras current markets

Increase in number of stores implies

increase in Data-Base size & need for

real time data-base

GEOGRAPIC DISTRIBUTION OF ZARA STORES


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IT System Layout

ModemDC Factory

Common Network

New IT Layout

Current IT Layout

PDA- 1

PDA-2 PDA-3

PDA: 1

PDA : 2 PDA: 3

Store -1

Store -2

PDA- 1

PDA-2 PDA-3

PDA: 1

PDA : 2 PDA: 3

Store -1

Store -2

No communication between stores

Unidirectional communication withModem

Communication between stores

possible

Bi-directional communication with

Modem


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EfficiencyBetter inventory

management

Inter-connected stores

Real time customer

insights

Trend analysis

Total investment (8.3

mn)Cost of replacing existing

DOS systemsOne time cost (License,

installation, hardware)

Annual connectivity

charges

Human resource for IT

Trade offNew System

0

0.5

1

1.5

2

2.5

Inditex North American

Retailers

0

0.5

1

1.5

2

2.5

3

Inditex North American

Retailers

IT Employee (%) of total

IT Revenue (%)


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Order Fulfillment Process

Offer received in

digital format

from La Coruna

Store 1

Store 2

Store 3

Segment 1

(Men)

Segment 2

(Women)

Segment 3

(Kids)

Store

manager

(Infrared)

Combined Order

Order is

generated & given

to La Coruna

Offer received in

digital format

from La Coruna

Store 1

Store 2

Store 3

Store

manager

Order is

generated &

given to La

Coruna

Current Order Fulfillment Process

New Order Fulfillment Process


19/20

Financials in millions of Euros

Year 2003 estimated 2002

Net Operating Revenues 4,848 3,974.0

Cost of Goods Sold 2,368.3 1,954.9

Gross Margin 2,480.0 2,019.1

Operating Expenses 1,480.6 1,179.8

Annual operating cost 0.127 -

Operating Profits 999.4 839.3

Non-Operating Expenses 288.1 224.3POS up gradation cost 8.2 -

Pre-Tax Income 703.0 615.0

Income Tax 213.2 172.5

Minority Interest 5.8 4.4

Net Income 483.9 438.1

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

Total cost of up gradation

Particulars Cost (in Euros)

Operating System cost (windows) 4,51,350Hardware cost 28,83,330

Connectivity cost 1,27,440

Installation charges 42,48,000

Programming cost 6,00,000

Total cost 83,10,120

Break up of costs

Onetime costs 81,82,680

Recurring cost 1,27,440

Recurring cost includes annual connectivity

charges

Rest of the costs are one time cost only


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Roadmap & Implementation

Requirements

Gathering and analyzing the requirements of the new system on the upgraded OS

Proof of Concept for feasibility

Selecting a migration method

Design &

Implementation

Identifying the resources and availability

Prototyping, Designing & Implementing

Testing the new system

Migration

A pilot run of the system for a country having less customers as compared to other

countriesExisting system running in parallel to the new system

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

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