Zara has pioneered the niche market and has presence in all continents: Europe, America, Asia, Middle East, and Africa. The website www. Zara prefers developing applications internally for its use, instead of buying the commercial available software. At the time of the case, the company relies on an out-of-date operating system, the P-O-S Point of Sale , for its store terminals and has no full-time network in place across the stores.
As much this system is outdated, it is still easy to maintain and operable and with this Inditex has built an extraordinary well-performing value chain. The case describes this value, concentrating on its operations and IT infrastructure. Zara Case Paper Analysis 5 Goals and Strategy Zara was developed with the initial goal to link customer demand to manufacturing, and link manufacturing to distribution.
Zara has been successful to remain focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. Zara introduces 11, new items in comparison to of its competitors. Zara treats the items as starting point instead of treating them as end of its design and procurement efforts McAfee, Zara competes in the market with a strategy where a vertically integrated supply chain is dedicated to customer responsiveness.
Zara has differentiated itself from its competitors by focused differentiation strategy, where it focuses on young, fashion-conscious city dwellers. Their commitment to this goal and their capabilities that they have developed to achieve it, have provided significant competitive advantage to Zara especially in the areas of product development, strategic partnerships and cost of production, advertising and marketing, and information technology infrastructure.
Speed and Decision-making Ortega and Castellano believed that Zara needed to respond quickly to the changing fashion trends, which were very hard to predict and hard to influence. It needs to target the young, fashion-conscious city dwellers. Zara wanted to deliver styles when they were in fashion, rather than persuading the customers through marketing. The hallmark of Zara is its pull process.
Another added advantage Zara has is of disintegrated decision-making. Instead of relying on the decision of a small group, it has given the autonomy to all the employees to delegate on behalf of the company. The senior managers hardly challenge the decision made by the commercials. Zara uses only 0. According to the marketing executive Miguel Diaz, stores and word-of-mouth are more influential than advertising Ferdows et al.
Hence, Zara maintains a cost advantage over its competitors. This cost advantage helps Zara concentrate on its stores. Thus, it can invest heavily in prime store locations, and store layouts. They are also able to change the store layouts more frequently as compared to its competitors. To aid this shipment philosophy Zara is able to afford the air shipment than the ocean shipment Capell, Diaz stated that the customers needed to try the clothes, which is not possible over the internet Ferdows et al.
Zara makes standardized and targeted use of IT McAfee, Zara believes on human intelligence rather than the computers to make the decisions. As they operate in various continents, Zara prefers to develop its own accounting software rather than buying the commercial available ones.
It has an internal IT department of approximately 50 people, which is divided into three groups: Store Solutions, Logistics Support, and Administrative Systems. Therefore, Zara makes the hybrid use of process and information for its smooth and rapid market response. It is useful to model the firm as a chain of value-creating activities. The model is useful in determining the ways in which an organization can implement IT or add value to the products and services.
The goal of these activities is to create value that exceeds the cost of providing product or service, thus generating a profit margin. The generic chain consists of five Primary activities and four Support activities. Model Application The primary activities will differ as the model of service changes, but the support activities will not differ. The primary activities at Zara are comprised of ordering, fulfillment, design and manufacturing, and among these activities, ordering was the most regular, precisely defined, and standardized around the world.
Zara has differentiated itself from its competitors by adding value in the every step right from manufacturing to distribution to sales. Zara has a flat and decentralized decision-making. The store managers at Zara had the autonomy to select the inventories at each store rather than depending on the headquarters to make the decision.
The store managers decided items on sale, and deal with the customers, property owners, and contractors. The store managers communicated with the commercials and worked in close proximity. The commercials decide on the clothes production and design and higher-level managers typically did not review their decisions. Zara does not stock inventory and so reduces the inventory risk. Zara has pioneered its operations, which enables the constant introduction of new items in short lead times.
Zara owns factories around the world and so can consistently move a design from conception to production and from production to DC to retail stores. The production of the items was determined according to the demand of the item to reduce the overall cost and inventory risk. Zara believes that its customers and stores are the form of marketing rather than advertising. Zara spends only 0. Most of the activities are common to other industries. On the support activities for Zara, it has an internal IT department for the development of various applications.
Zara is more concerned with finding the exact retail site that best suits the company rather than spending the extra money on luring customers into the store. Now its competitor is worldwide. All three had narrower vertical scope than Zara, which owned much of its production and most of its stores. Benetton, in contrast, had invested relatively heavily in production, but licensees ran its stores.
Question for Discussion 1. As completely as possible, sketch the supply chain for Zara from raw materials to consume purchase. Discuss the concepts of horizontal and vertical conflict as they relate to Zara. Which type of vertical marketing system dose Zara employ? Dose Zara experience Disadvantages from its fast fashion distribute system?
Are these disadvantages offset by the advantages? How dose Zara add value for the consumer through major logistic function. Discussion of Questions 1. As completely as possible, sketch the supply chain for Zara from raw materials to consumer purchase. As the case points out, finding the starting point of a product concept is hard to nail down with Zara. But the following is an attempt to do this: Design: The starting point is a collaborative phase that includes teams of creative professionals who carry out the design process and store managers who spot trends and feed data to corporate.
Materials: Zara makes 40 percent of its own fabric. It is not clear from the case where the other 60 percent comes from, but given the information on the rest of the process, it is likely purchased more on a local basis than on a global basis.
Cutting: Zara produces more than half of its own clothing. It cuts all fabric in- house at its complex in Spain. Sewing: Cut fabric and designs are sent to one of several hundred local co- operatives.
Ironing: Ironing is performed in-house by workers trained for a specific task lapels, shoulders, etc. Final preparation: Clothing is wrapped in plastic and transported on conveyors to local Zara-owned warehouses. The automated warehouses sort, pack, label, and allocate clothing items to specific regions and stores. Delivery: Stores within a hour drive receive deliveries by truck.
All other stores receive their goods via air parcel. Since they are not producing classics, customers would regularly buy clothes to be in style.
Although Zara has a website www. There are two reasons supporting it. Moreover, it would be complicated to handle returns of merchandise bought online.
Financials and Growth In , Inditex operated 1, stores in 45 countries and of it is in line with Zara store chain. Forty-six percent of Inditex's sales were from their operation in Spain and Executives of Inditex felt that there is a possible growth with its current markets. Zara had very few stores in Italy despite the fact that people there were some of the most fashion conscious.
Zara's Italian stores were extremely popular. They think Inditex's expansion can took place in Western Europe without building entirely new production and distribution network to support this future growth. Zara has control on all its business activities from design to distribution and retailing, which gives the company total business management. Mobile tracing system directs items along automated carousels to specific areas for packaging and shipping. Every item in the local factories is sent directly to a centralized distribution center located in Arteixo, Spain via an automated underground monorail that has miles of track.
IT integraton from stores and distribution centers ensures that short supply is allocated to factories or redistributed from other stores. Having a centralized distribution and JIT production schedule, Zara creates a more efficient production and distribution process. The order consists of replenishment of existing items and initial requests for newly available garments.
The quantities for replenishment are predetermined based on past selling data for those who missed the order submission deadline. The manager also decides the replenishment quantities by walking around the store, manually counting the sales, and talking to the sales personnel. Since Zara has no inventory system, they have no choice but to use canvassing model. Included in the offers are descriptions and pictures of newly available items plus all the replenishment items still available in the stores.
The offers are based on garment availability, regional sales pattern, forecasts about sales in each location, etc. To have an efficient ordering process, the offers are divided into three segments. First, the store staff will fill out the offer for their segment. The first information was the aggregated orders from all stores, which were finalized soon after the order deadline had passed, and the other one was the total supply of inventory in the DC at the same point in time.
The commercials played vital roles in the fulfillment and delivery of orders. When supply and demand line up closely for a specific Stock-Keeping Unit SKU , commercials were not required to make hard decisions because they simply allowed the inventory to be divided among all the stores via the computer. If the demand was greater than the supply, it was also their task to decide which store would receive the available inventory and which would not.
The commercials also worked with product managers to determine future production. If the demand for an SKU exceeds the supply in any ordering period, production would be increased as quickly as possible.
But if supply started to exceed demand, the commercial would decrease replenishment requests and eventually stop placing new factory orders altogether.
Finally, they could also ship new items that the store did not order. These items were released to assess demand. Store managers would expect such deliveries periodically. Deliveries were expected after one to two days after the order was sent. Clothes were continuously shipped from factories to DCs to stores where they were ready for sale through either by land or air depending on the location of the store. Each section of all stores ordered twice a week, but different sections received shipments on different days.
But due to competition, Zara also brought out new items continuously throughout the year, including both changes to existing garments and entirely new creations. As a result, Zara introduced 11, new items in a typical year while their competitors averaged only 2,, Cut fabric was sewn into garments at a network of small local workshops that guaranteed quick turnaround times. All finished garments were then sent to a Zara facility, where they were ironed, inspected, given a machine-readable tag, and sent to a DC.
With just a short period of time, the clothes could be on sales racks in stores around the world. After the initial estimates, they would form their initial product requirements.
Approaches and Organization The company provided clothes before they got out of style, generally with the help of employees who dealt with young, fashion-conscious customers whose tastes in clothing changed rapidly.
Zara had no chief information officer and no formal process for setting an IT budget or deciding specific technology investments or projects.
What the company had was an IS department of approximately 50 people. For example, instead of buying software, Salgado and his colleagues preferred to write the applications themselves. Most applications were developed internally. Personnel were recruited from local universities and mostly from Galicia.
The last one, i. Shipments to stores increased the theoretical inventory, and sales decreased it. The large computer-controlled equipment that cut cloth into patterns was the most sophisticated technologies inside the factories.
These machines minimize scrap and could cut over layers of fabric at a time. Distribution Centers DCs The distribution centers of Zara greatly relied on automation and computerization. Also, they used these conveyors to recombine garments to be shipped for each store. Even though Zara relied on computerized DCs, humans still play a very important role. Image 4. Inditex Distribution Center 5.
Before Zara used PDAs, many employees inside the company felt that it was costly and too long to fax order forms back and forth twice a week. It was time-consuming to send and receive a more or less meter long order forms containing a lot of SKUs.
Also, the unreliability of fax machines and paper shortages presented delays and frustration into the ordering process. The use of PDAs was introduced in Zara upgrades the PDAs as devices are discontinued or technological advances are available.
DOS, together with the internally developed POS application, had been proven to be reliable and easy to roll out and maintain over time. It was easy for store employees to start up and shut down the terminals. Setting up and maintaining the POS infrastructure was also done with ease. In unfortunate cases, a software reinstallation was straightforward to fix the problem.
In short, neither opening new stores nor having a large IT support organization requires an IT support. Only one POS terminal for each store had a modem. Also, stores did not have an in-store network to transmit data. Employees copied sales information to floppy disks and then carried it to a modem-equipped terminal to finish the transaction. These devices did not contain information that could be used when another Zara store is out of stock.
Store personnel telephoned one another to answer the problem. Image 6. Issue Zara had been using a stable IT system for its sales operations that helped the company position itself in the retailing market.
Problems A. Secondary Problems 1. If they are not migrating to a new OS, should they stock up on current POS terminal to protect them from sudden loss of support? It helped Zara in its operations — from ordering, sales recording, up to other business functions. Zara is the only customer who uses the unsupported operating system.
The floppy drives contain all the necessary software and applications. IT involvement is not entirely needed. Additionally, floppy drives are seldom used. Software nowadays is readily available in CDs or it can be downloaded online. There are new and advanced operating systems that are readily accessible such as Windows, Linux and Unix. The Windows OS is developed by Microsoft. Unix, on the other hand, is a multiuser operating system that is widely used in mainframe computers, workstations and Internet servers.
In opening a new store, the availability of DOS-compatible terminals would be a problem to Zara. However, this does not mean that Zara should not consider continue using their current system. In addition, a separate distribution system does not have to be engineered since all Zara items flow through one centralized distribution system. It must also be noted that Zara employs the use of franchising and joint ventures to surpass barriers on direct foreign entry of companies.
This system gives more opportunity to grow without needing a lot of equity. However, franchising and joint ventures could lead to dependency on the partners and lead to lack of control in the long run. Thus, this scheme was advantageous with globalization of fashion trends and convergence of fashion with time and building a unique style of Zara.
Interestingly, the prices of items vary with distance of location from Spain, meaning the customers bore the expenses of transportation, which reduces the transportation costs involved in the distribution system. Hence, these factors make expanding to foreign markets cost efficient and flexible.
Though this would incur an initial cost, with time it would be easier and more cost efficient to have a distribution and production center in close proximity to the target market.
For instance, opening a distribution center in Asia would enable Zara to not only tap into cheap labor but also use Asian production sites to produce high risky fashionable products instead of relying on manufacturing close to home headquarters in La Coruna.
This would further enable Zara to be present in more countries and strengthen its brand image. Moreover, having a distribution center close by would mean lower cost of goods, which opens up the market to lower income consumers as well. Thus, committing to a second region seem more beneficial to sustaining the brand with time.
Further, it would be vital to focus more on media advertisements and marketing as the number of retailers has risen drastically around the globe making it difficult to simply promote its brand name and product via presentation of stores and word of mouth. With the increasing use of technology and with the busier lifestyle led by most populace, many, especially the working class, do not find time to personally visit stores to buy produce.
It is a perfect example to demonstrate how the interplay between tangible, intangible and capabilities is able to procure a competitive differentiation and positioning while increasing the efficiency of operational capabilities while reducing costs. Moreover, it is important to adjust the strategies and business model to match the changing environment to be able to compete with evolving rival companies.
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