Zara - IT for Fast Fashion

 

Zara - IT for Fast Fashion

Key Problem

In the Zara case study, Zara relies on time to make clothes for young and hip fashion-conscious city dwellers. Zara needs to respond quickly to their clothing product as fashion changes rapidly, so time is an extremely important to the unique clothing line. Zara is Inditex’s largest chain store and they use point-of-sale (POS) terminals with a Microsoft disk operating system (MS-DOS). A major weakness of Zara is the speed of implementing a new technological system.  Zara has continued to use an outdated Microsoft DOS – disk operating system compared to Microsoft OS - operating system. Microsoft launched OS in 1985 and 18 years later Zara is still using DOS. The key problem is Zara needs to upgrade their applications and add functionality, and networking capability.  

Assessment of the Three Alternatives

            The first alternative is to remain using the POS terminals with DOS. As this was mentioned to me during a sales call, “If POS is not broken-why do we need to fix it?” Microsoft does not support DOS and Microsoft launched OS in 1985. The type of technology is outdated.  Microsoft doesn’t support DOS so there is a major concern since this is obsolete.  

            The second alternative is to upgrade the POS terminals but not replace DOS. There would be a major problem if the upgrade was POS hardware only. The upgraded POS terminals are not compatible with DOS so this isn’t a practical solution. The results in delaying any new stores without the proper hardware/software would be a negative effect on Zara’s image.    

            The third alternative is to upgrade the POS terminals with Microsoft OS-Operating System. The upgraded hardware accompanied with OS is the most practical IT solution. This would be the most efficient solution and it can increase productivity. Also, you don’t have to carry a floppy disk for daily sales and would save time for management. Microsoft doesn’t support DOS therefore it’s imperative to move to the new technology.    

Recommendation

            After reviewing the three Zara alternatives, I would recommend installing new POS terminals (hardware) with Miscrosoft –OS throughout the company. It’s unacceptable that DOS is currently being used, as Zara has done minimal to upgrade their IT solution. There are several advantages of upgrading to OS: 1) Easy transition, 2) Better visibility with inventory, 3) IT Processing Speed and 4) Boosts employee morale. The hardware POS vendors make it aware that an upgrade would be an easy transition. There was a theory that Xan Salgado; the head of IT stated “95% of inventory is pretty good and you don’t need to be more accurate” is absolutely incorrect. Salgado is sending the wrong message as there leaves room for theft, errors and lost revenue. The new PO OS application allows monitoring inventory more efficiently, thus making Salgado’s theory archaic. There would be fewer phone calls from each store, as the Internet gives access to each store’s inventory. For example, the high speed Internet connection would be added and the dial up would be eliminated. This helps staff and management with quick decision making. The new POS and OS applications boost employee morale. Store managers are looking for an upgrade, as this was mentioned to me, an upgrade can assist managers in making their jobs easier. For example, the floppy disk DOS would be replaced by the OS –no more carrying floppy disks around.             

In my opinion, I would terminate Xan Salgado, the head of IT and Bruno Sanchez technical lead for the POS system for Inditex. It’s unfortunate, but Inditex needs leaders who can implement the new POS terminals with OS. There should be no confusion at this point in Salgado/Sanchez’ career.  Inditex needs an aggressive and technology savvy department that is willing to take control of this outdated program. It starts at the top with the CIO. Zara would have significant increases in expenses: in salaries, benefits and consulting fees.  There would be a significant amount of investment in the new headcount, adding value to Zara’s business to grow and increase revenue. Here is what I recommend for staffing as there needs to be a new IT régime in place for a new effective solution.   

New IT Department:

            1) Hire a CIO – Chief Information Officer

            2) Hire an Infrastructure Manager

            3) Hire 2 Business Analysts

            4) Hire 2 IT Computer Support Specialists

            5) Hire 2 Internet IT Specialists

            6) Hire an IT administrative assistant 

            7) Create an IT Committee Team (long term goal)                    

           8) Reduce and eliminate Salgado/Sanchez positions in the IT department                                                                               

 Also, I encourage Zara to incorporate the Internet into their business model for purchasing clothes on the web. The Internet is major player in purchasing in today’s market and this gives Zara another opportunity to increase revenues. The Internet is a marketing “business partner” and Zara can build on the future with the Internet.  I recommend to pilot Spain as the first country to buy on the Internet as this is home base for Inditex. You can learn from a pilot country before going live for all countries. Spain will give you an opportunity to learn about the Internet business and give you enough time to open it to all the countries around the world. 

Profit/Loss and Balance Sheet - Financials:

            IT expenses would significantly increase due to creating an IT department with salary, benefits and computer depreciation expense by 3.2 million Euros in the first year. There would be approximately 1.2 million Euros in employee salary/expenses and 2  million Euros IT computer equipment depreciation expenses (10 million Euros divided by 60 months -5 year depreciation in computer equipment).  The 3.2 million Euros is an extraordinary amount but there is opportunity in revenues.

There are an endless amount of opportunities to increase revenues.  The Internet would contribute the increase revenues substantially. The Internet allows purchases on-line and this would be an unbelievable milestone to have Zara go into this new line of business (2003 Guesstimate 10 million Euros). The other increase in revenue is inventory. Also, there would be better inventory visibility so managers can to look up other stores to make transfers and this requires less time on the phone (2003 Guesstimate 5 million Euros).   

                                                                                                                       2003 Budget (Revenues - Expenses) with new IT applications only:   
                                                                                                                                                    15 million Euros (additional profits) - 3.2 million Euros (additional expenses)  =  11.8 million Euros Gain!!!

   
IT can make a significant impact in the balance sheet in total assets (Property Plant and Equipment & Cash and Cash Equivalents). Inditex has “too much cash” on hand at 525.9 million Euros in  the 2002 financials listed in Cash and Cash Equivalents (See Exhibit 5). It’s an outstanding to have 525.9 million Euros in positive cash but it’s better to make an investment with cash in order for Zara to increase net income. There has been no major investment throughout the years in technology and IT spending wouldn’t be a bad thing. In my opinion, if there is an increase in technology (Software/Hardware –IT Assets) with the proper strategy and planning, there will be an opportunity to increase revenues and net income. I recommend spending cash funds on IT capital as Property, Plant and Equipment (PPE) would increase. Also, I prepared a financial analysis for Zara, it would cost approximately 10 million Euros in the POS OS upgrade. Overall, cash would reduce by 10 million Euros, PPE would increase by 10 million Euros with IT fixed assets but total assets would remain the same.  See Exhibits Below:   

Exhibit - Inditex Financials (millions of Euro)/2003 Budget
Year	2003 Budget	2002	Comments
Inventories	383	382	Better tracking inventory stagnant
Accounts Receivable	280	238	Increase in sales due to better IT
Cash and Cash Equivalents	516	526	Decrease due to IT fixed assets
Total Current Assets	1,159	1,146
Property, Plant, Equipment	1,423	1,413	Increase due to IT fixed assets PO OS
Other Non Current Assets	495	455
Total Assets	3,097	3,014	PPE/Cash Offset
PPE: Fixed Assets	2003 Budget
POS Terminals -Hardware	6
PO OS -Software	3
Installation/Training	1
IT PO OS Implementation	10

Final Thoughts

            I am excited about the opportunity to look for improvements in technology. There is a plethora of IT improvements that can be made in Zara’s technology and upgrading to POS OS would help contribute to increasing your growth, revenues, net income and net margin. The recommendations will not require a complex solution, as its necessary to upgrade to the POS OS and the addition of purchasing clothes on the Internet is manageable with additional IT staffing.  Zara must identify an IT leader (CIO) in order to make a commitment to implementing the POS OS software/hardware. I understand that time is a major requirement for fashion and upgrading POS terminals with OS can fit the speed for IT processing. I don’t want Zara to be fashionably late in today’s technology.