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Two words summarize Zara’s competitive advantage: Fast & Efficient. Zara’s first CEO Jos Mar Castellano R established a clear business idea that represents every effort Zara’s management exerts today: “Link customer demand to manufacturing, and link manufacturing with distribution.” In a basic sense Mr. Castellano wanted his every critical element from Zara’s Supply Chain (SC) interconnected and sharing information real time.
Decentralize decision making. Zara’s management understood their market well. Their customer base were young, fashion conscious and their taste in clothing changed rapidly.
In order to satisfy their market, clothing lines needed to move from concept to shelf extremely fast before the hype for a style faded. Their average turnaround time was approximately three weeks with a 75% inventory changeover every three weeks in comparison to two months for their competitors to design and manufacture. This time frame allows Zara to respond to the fast-changing and npredictable taste of their customers faster than anyone else. Zara was able to accomplish this expedient manufacturing through the empowerment of store managers which identify the latest trends that would sale on their stores rather than having a central head office that was separated from their markets decide for them. Groups called “commercials” had great prudence on what clothes would be designed and produced. These teams of “commercial” consisted of two designers and two product managers, who had the autonomy to purchase materials, placed production orders, and set prices. In addition to “commercial” teams, there was another group called store product managers, which worked closely with product teams and serve as the main interface between Zara stores and Zara’s main headquarters at La Coru. This team traveled extensively and interacted with store managers and their markets to understand what kind of clothes are selling and what kinds of clothes would sell. The decisions made by these teams were rarely reviewed since it would compromise the company’s speed and decentralized decision making.
Zara’s IT in par with business strategy of speed and decentralize decision making. Each information system (IS) throughout the Inditex enterprise is unique and simple.
There are four main enterprise levels or areas within Zara: La Coru (HQ), Factories, Distribution Centers (DC), and Stores. Each of these levels possess some type of internally developed application or systems that supports a business process in an simple, expedient and efficient manner.
Head Quarters use internally developed applications to support operations. The systems at La Coru used critical decision making attributes that can directly impact sales. The first application consisted of offer/request sreparation and distribution. This system received orders from all the stores around the world and distributes them through the Internet. The second application compares the aggregated order to available inventory, highlighted where supply and demands where imbalanced, and executed commercials’ decisions on how to allocate the products. The last application kept track of the “theoretical inventory”. It was theoretical because the inventory would become inaccurate due to a lack of accounting procedures for theft, damage and other losses. Inditex wasn’t too concern about a 100% accuracy of this systems since the reward to cost ratio of keeping a 100% accurate system was inefficient or negative.
Enterprise Factory level used simple applications for production. The applications for factories did not use complicated methods to generate optimal plans and schedules. The process was far simpler. Factory managers were presented with quantities and due dates for all production requests. Managers in turn used this information load factories and set job schedules. Moreover, the most sophisticated equipment in a factory was a computer controlled machine that minimized scrap material.
Distribution Centers level enjoys a great deal of automation and computerization. A large automated conveyor belt system reorganized garments from factories into shipments. In collaboration with the vendors, the Zara’s IT department wrote the applications that controlled its unique DC automation. Furthermore, this system expedited the distribution process to the point that there was hardly any inventory anywhere in the supply chain.
Store Information Systems allowed for fast setups, fixes and uncomplicated use. Each store possesses two simple systems: Point of Sale (POS) information systems and
Personal Digital Assistants (PDA). The old POS terminals run on DOS operating system which is no longer supported by Microsoft. Nevertheless, due to its stability, effectiveness and ease of setup, maintenance and use, Zara continued to develop applications that run on DOS. In addition, given how easy was to set up and operate, no technical support was required to support new stores. PDAs, on the other hand, were constantly updated as devices were discontinued and new technology became available. PDAs were mainly used for tasks such as ordering, handling returns and receiving information from HQ. One important feature that these systems did not posses was real time connectivity between HQ and all other stores that could help share inventory numbers for all stores, a feature could maximize turnover capability.
Zara’s IT infrastructure and funding is 80% less that the average retailer. It is interesting to note that roughly 1,558 owned by Inditex (Zara’s parent Company) where supported by approximately 50 professionals with a budget of 25M or approximately 0.5% of its revenue and was centrally managed at La Coru. The IS department of approximately 50 people was responsible for application development and other IT activities. This department was divided in three groups: Store solutions, Logistic
Support, and Administrative Systems. Amazingly this minimal investment of human and financial capital sustains an operation 3.9B in net operating revenues.
Future changes in technology a hazy vision. Zara has an extremely efficient supply chain. Any positive change on its current IS infrastructure would account for just a couple of positive percentage point in revenue. On the other hand, if it fails, it has a potential for catastrophic effects hindering Zara’s speed and efficiency. Nevertheless, remaining stagnant and allowing its system to become more outdated, the cost for support could become exorbitant and in the future the cost of catching with the new technology will be greater. This would directly affect Zara’s business strategy.
Modernization of Inditex (Zara) information systems infrastructure should proceed. Plans for an Information System infrastructure modernization should be in place and must incorporate a strategy for interoperability with legacy systems so a phase-in approach could be implemented. A phased in approach will allow the future technology to mature and become more reliable in order to minimize possible negative effects of its implementation. Furthermore, training programs could be simplified to the point that the actual system educates its user for installation, operations, and trouble shooting procedures; comparable to the way a windows wizard helps with processes. In short, a IS modernization strategy is a risky but necessary move. What’s more, after analyzing the
NPV values of this IS project using Zara costs estimates and applied to the entire Inditex yearly revenues and number of stores for 2002, I found that the NPV in 6 years of the modernization project is positive 126M (Exhibit 1). I recommend going forward with a phase in approach as soon as possible.
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