Zara's outdated IT infrastructure and operational inefficiency challenges

Zara Case Analysis

Zara: IT for Fast Fashion is a unique case study in that it powerfully illustrates how a lack of IT integration and process efficiency can over time force an organization into complacency, lowering the standards of performance due to a lack of real-time market and operations data and analytics. The POS terminals that are running on a discontinued version of the Microsoft DOS operating system is a metaphor of the entire company's approach to using IT more effectively. Adopting a more agile IT architecture based on the Software-as-a-Service (SaaS) platform is needed. Integrating ordering fulfillment, distribution and manufacturing is needed.

Case Synopsis

Zara's management teams are being pulled in spe4rate directions as the company continues to aggressively expand, operating 11,558 stores in 45 countries as part of the Inditex group, 550 of which are branded as Zara stores. Inditex is on pace to open one store a day throughout the time period of the case study globally. The in-store inventory management, ordering, forecasting, pricing and merchandising systems are either manual or semi-automated, leading to many potential areas of errors occurring. The POS systems that are so easily installed and used based on the MS-DOS operating system are archaic and outdated by several technology product generations by the timeframe of the case in 2003. These terminals have become the metaphor for how behind current technologies and best practices in automating retailing Inditex is corporate wide, particularly impacting the performance of Zara.

There are many areas Zara's operations that reflect how the outmoded technologies they are using are impacting their performance. Beginning at the store level, the illusion of ease of setting up new stores with a POS terminal running MS-DOS hides more severe problems. The greatest is the lack of visibility and traceability of inventory levels. Taking inventory by hand is a very good way to get inaccurate counts that have a direct effect on in-store profitability. Second, there is no real-time reporting on pricing performance by product category, no visibility into which sale items are doing well and why, or even a count by total items sold daily. Zara's management reverts to an economic order quantity (EOQ) automatically if an order is not received which in many instances is no doubt just perpetuating mediocre and substandard retailing practices.

The lack of automation around forecasting and the disjointed fulfillment processes can also lead to very costly operations errors for the company as well. The complacency around archaic technologies are leading the company to be complacent about far more severe problems that are impacting their business. At the corporate level, the lack of a centralizing analytics or business intelligence function for optimizing the data collected from order management, fulfillment and distribution and manufacturing will eventually slow down their profitable global growth. The velocity and exhilaration of being able to launch stores literally overnight and not invest in training for more advanced Point of Sales (POS) systems is blinding management of severe problems that will take millions of dollars to fix and cut into months, if not years, of productivity.

Analysis of Problems Encountered in Business Processes and Operations

Zara has acquiesced into complacency on its IT strategies corporate-wide with the greatest evidence of this being at the store level. The lack of integration across the order, fulfillment and distribution and manufacturing systems and strategies of the company are making its in-store inventory management and pricing strategies orders of magnitude more inefficient. There is very little information sharing throughout their distributed order management process, beginning at the store level and progressing through the distribution centers (DCs) and warehouse locations (Tokar, Aloysius, Waller, Williams, 2011). Instead of addressing this lack of information technologies and systems integration however, Zara's senior management continues to perpetuate the focus on ease of store roll-outs by relying on outmoded POS terminals that run on a discontinued operating system instead of seeing information technology as a transformational force that could take Zara and all of Indetix to the next level of performance from a market share and financial standpoint.

The lack of IT coordination has over time seriously impacted the company's ability to stay competitive and created a complacent, risk averse culture that is gradually reducing the company's ability to compete. Using the Value Chain Model (Porter, 2000) to evaluate the performance of the company by comparing its primary activities and the complementary role of support activities, it is apparent that Zara is not realizing nearly the amount of gross margin it has the potential to generate by relying on outmoded technologies that are easy to implement but don't come anywhere near the company needs to be in order to gain market share relative to competitors. One of the most glaring aspects of the Zara IT strategy is the lack of customer information, with the second-most being the lack of competitive analysis of its comparable retailing chains in key countries targeted for growth. It is doubtful that competitors in Italy, the nation senior managers at Zara are concentrating on, are relying on drastically outmoded technologies. While it is arguable if competitive analysis is part of this analysis, it is squarely in the middle of the Resource-based View (RBV) of organizations that Dr. Michael Porter is one of the leading advocates of (Porter, 2000). From this RBV-based vantage point, the point of using value chain analysis to evaluate Zara's use of its internal resources is highly relevant. Clearly with competitors ramping stores faster and with greater focus on core geographic markets by country, the use of multichannel marketing and selling strategies, more effective use of distributed order management and CPFR strategies is highly probable.

Using the Value Chain Model to Assess Demand Management Strategies at Zara

The greatest strategic threat the company has today is the lack of consistency with its demand management strategies, and more specifically the complete lack of coordination across planning, forecasting and replenishment. In short, the Collaborative, Planning and Forecasting (CPFR) process is disjointed and when in place, archaic and dated by 21st century standards. There is no customer data included in this process, a core requirement to having the CPFR process successful (Phan, Vogel, 2010). There is also little if any collecting of data for transformation into information and further use in analysis (Chu, Messinger, 1997). As a result of these deficiencies the basic vision and mission of the company is not being fulfilled, as defined by the founder in the opening statement of the case.

Using the Value Chain Model to assess the disjointed IT strategies of Zara shows the potential to transform product and pricing strategies at the store level. A successful CPFR process will be able to unify demand signals (or orders) at the store level, aggregating them at the corporate level to efficiently and profitably drive supply chain, purchasing, procurement and long-term product strategies as a result (Sagar, 2010). The Value Chain Model analysis of Zara illustrates this point. Starting with the Primary Activities of Inbound Logistics, progressing through Operations, Outbound Logistics, Marketing and Sales, and After Sales Service the Zara value chain indicates how the manually-driven processes are causing the company to delay key decisions or worse, automating them (in the case of EOQ levels by store) in effect automating mediocrity throughout their business. The bottom line is that Zara does not know how to use information technologies as a competitive weapon; it is rather a satiator and protector of the status quo -- and a sure path to being weaker and weaker in a highly competitive market. It may feel very good to launch stores with outmoded POS systems that run on DOS, and can be turned off even without logging off, but that complacency will kill this company if they don't change.

The senior management team needs to take the Value Chain Model and benchmark their performance across each of the Primary Activities, assessing how their Supporting Activities are deficient in contributing to greater margin generation. The essence of the RBV of strategy as promulgated by Dr. Porter also suggest that Zara's competitors are more successful than they are because they are using IT as a competitive weapon to enter new markets and dominate them - that is implicit in any RBV-based view of a firm (Porter, 2000). But it's worse for Zara than that. They have become so complacent in their IT strategies that their entire culture is losing competitive focus and intensity to win more in key markets using analytics and business intelligence to power more effective decisions. For an analysis of the Zara Value Chain see Figure 1.

Figure 1: Zara Value Chain Analysis

Sources: Zara: IT for Fast Fashion Case, (Porter, 2000)

Implementation Opportunity Analysis

Prioritizing the many opportunities that Zara IT has for improving the operations of its business are defined in this section of the case analysis. As has been mentioned before, the lack of coordination on demand management is the most costly broken process company-wide. The IT strategy best aligned to this initiative is to initiate a CPFR process that unites stores, order management, fulfillment and distribution and manufacturing (Sagar, 2010). A second major initiative the company needs to deal with is the lack of multichannel management and selling through its website and other potential electronic channels. The third most pressing IT initiative is the pricing system needs to be completely revamped and updated to make it more competitive. Lastly, the POS system either needs to be replaced or updated depending on the decisions made on other IT initiatives.

Table of Problem Identification

IT Initiative

Functional Areas Affected

Business Processes Involved

Decision Levels Impacted

CPFR Initiative

Store Operations

Order Management

Design & Mfg.

Product Management

Commercials

Order management

Fulfillment

Distribution and Manufacturing

Qtrly forecasting and pricing strategies

Distribution channel strategies

Multichannel marketing and selling

Commercials

IT

Marketing

Order Management

Product Management

Pricing

Customer Service

Online Ordering

Order Mgmt.

Pricing

Product Management

Logistics

Pricing

How product lifecycles are managed over time

Pricing models and tables by each product line

Which products are offered at what point in the product lifecycle online

Pricing System Upgrade

Commercials

IT

Marketing

Order Management

Product Management

Pricing

Order management

Fulfillment

Distribution and manufacturing

Product Management

Logistics

Gross margin by product category and product class

Stage of product lifecycle pricing changes are made

Pricing analysis including price elasticity to measure overall elasticity by each product area

POS System Update

Commercials

IT

Product Management

Store Operations

Inventory

Logistics

Store Mgmt

Whether to replace POS systems or go to an entirely new cloud-based or SaaS system

Buy a POS provider

Implementation Effectiveness

The most pressing issue for Zara is the lack of inter-process integration between its order fulfillment, distribution, design and manufacturing systems and processes. The extent of the disconnects are causing the company to revert to automated and easily done ordering levels within their stores that are drastically reducing overall operational performance. In addition, these in-store systems are being supported by in-house, often custom-programmed applications that have been developed by IT themselves. The risk of using these systems from a continual upkeep standpoint is significant, and the potential brain drain from IT could drastically reduce the value of these applications over the long-term. While Zara had the advantage of supporting their unique business processes very precisely by building applications internally, over the long-term this type of strategy from an IT standpoint will not scale. This is also potentially very expensive to replace with applications based on current-generation technologies. To continue down the IT strategy path Zara is on right now, the costs from an IT standpoint will be only a fraction of the business value lost from process and strategy inefficiencies. The company clearly needs to get in control of its core business processes using a CPFR-based framework to accomplish this.

For retailers the best strategy for pursing CPFR is to deploy a low-end Enterprise Resource Planning (ERP) system that includes the basic analytics and business intelligence applications, in addition to modules to support CRM and supply chain management (Sagar, 2010). For Zara, all of these tangential areas of ERP are critical to their future growth, and the ability to translate demand into manufacturing orders, while also keeping a broad base of products and an eclectic mix of styles in stock and moving the pipeline if their business is to continue growing over time. Balancing the stability that an ERP system would provide with the agility it would make possible are critical concerns for Zara at this point. While their technologies are archaic today, the lack of process efficiencies and lost margin will accelerate quickly of Zara does not address this critical issue of CPFR efficiency. The tangible costs of implementing an ERP system in a company the size of Zara would be nearly $4M including professional services. This would also provide for an Internet-based portal for managing inventories, supply chains and pricing. It would also provide the software platform to support multichannel retailing, an area of marketing and selling that Zara is nearly a decade behind competitors at this point. The intangible costs are the change management programs that would need to be put in place to ensure the new system was adopted and used as it was designed to be. In addition the redefining the core inventory, product management and pricing strategies throughout the stores, the adoption of the ERP system would also force Zara to drastically reduce the amount of "maverick" forecasting and buying they are doing today and stay consistent to a strategy. While the case does not analyze or provide insights into how the store's operations today impact the overall purchasing and strategic sourcing systems, it can be inferred these are major areas of cost overruns given the many symptoms of cost- and process-overruns throughout the stores.

Conclusions and Recommendations

The lack of real-time information throughout Zara is breeding a level of complacency that is dangerous to their long-term survival. The POS Terminals aren't the biggest issue, the lack of integration between ordering fulfillment, distribution, design and manufacturing are. The reliance on homegrown, often highly customized applications is also forcing the company into a situation of having to invest in proprietary, difficult-to-use technologies that will just cost more over time to support. What is needed is a complete overhaul of the entire IT system, beginning with the CPFR process that is lacking in the company. Using a retail-based ERP system, many of which include modules for CRM, supply chain management, pricing, store-based operations including real-time integration to Software-as-a-Service (SaaS) POS systems (Flinders, 2005) Zara could not only catch up to, but also completely bypass their main competitors globally. It is highly recommended the company pursue a re-vamp of their IT platforms and become more focused on the CPFR initiative as a strategic priority first (Sagar, 2010). Second, the supply chains need to be more integrated into the core operations of the business as well. The effects of supply chains on retail businesses is significant and can make more than a 40% difference in overall performance from a profitability and time-to-market perspective (Gentry, 2010). Today the supply chain at Zara is partially automated and as a result, the stores often lag in terms of pricing and inventory status, which in turn slows down the revenue cycle for the entire company.

Third, the platforms supporting the stores, today POS Terminals running MS-DOS are a ticking time bomb that will eventually cost millions of dollars to fix if Zara does not take action now. When Microsoft discontinues an operating system the entire retail transaction system is based on, it's time for IT at Zara to think about a Software-as-a-Service solution, as choosing this path of migration delivers the same benefits of the POS Terminals today. With a SaaS-based solution to the POS Terminal issue, Zara will no longer need to be concerned with having to send out a technician to each store that opens, will also not have to worrying about extensive boot-up processes, and best of all, a SaaS solution will directly provide real-time reporting of sales corporate-wide, while also reducing the barriers to adoption as well (Gray, 2010). SaaS-based applications are delivered entirely through a Web browser and also have support for POS terminals as well (Flinders, 2005). Unifying all stores together on a SaaS platform will also drastically reduce inventory, pricing and ordering errors while also increasing the availability of real-time information as well.

Zara also needs to concentrate on bringing Radio Frequency identification (RFID) tags into all their stores, across all product lines. The many benefits of RFID include real-time inventory management, the ability to capture sales in real-time, and a drastic reductions in logistics and warehouse management costs as well (Azevedo, Ferreira, 2009). RFID would also make it possible for Zara's product management and commercial teams to also define key performance indicators (KPIs) and metrics of performance, while also capturing a wealth of product, sales and returns data (Owunwanne, Goel, 2010). The cost savings that RFID would make possible could fuel the development of entirely new stores throughout Italy for example.

The final recommendation strikes at the heart of what is wrong with this company. It is not using information wisely and effectively enough to overcome the inertia and lack of focus on being competitive from a technology standpoint. What the company needs to do is concentrate on adding in a layer of analytics and business intelligence, linking in their CPFR process and RFID systems to enable a true real-time enterprise. Once the company achieves this, they will be able to compete more effectively. Analytics and reporting, by business process, can significantly reduce costs while increasing operating efficiencies, providing insights and intelligence not known before (Shen, 2011).