Preparation of Zara: IT for Fast Fashion case

Zara

IT for Fast Fashion

Zara was established in 1975 by Amancio Ortega. He was the largest shareholder of Zara and the richest man in Spain until 2003. Jose Maria Castellano joined the company in 1985. He had worked as an IT manager and shared Ortega’s belief that computers were critically important in enabling the kind of the business they wanted to build.

Issue Description:

Zara is facing an issue whether to upgrade its current IT system or not. Salgado has the priority to upgrade the current POS system whereas Sanchez thinks that it is not necessary. Salgado believes the system should be upgraded in order to avoid the risks due to hardware changes by the vendor. He doesn’t want Zara to be in any compromising situation. The retail Point of Sale (POS) system is working smoothly and it requires minimum maintenance. Sanchez’s argument is that why fix the POS if it is not broken. Company continued to use an outdated, DOS operating system for their POS terminals. Microsoft no longer supports DOS system. Sanchez developed the in-house POS application that was specifically designed to run on DOS. Sanchez and Salgado are having dilemma of choosing between current IT system based on DOS or upgrade to a new operating system such as Linux or Windows.

Drawbacks of current POS System:

• One problem is that the hardware vendor for POS terminals could upgrade their machines or some peripherals that they are not DOS compatible anymore. Because of that, Zara cannot purchase the new POS terminals for new stores.
• This system is lacking in terms of individual stores’ inventory management. When a sale is entered into a terminal, there is no way to report that in the inventory. Store managers manually count the items in stock to conduct the inventory in order to determine which items need to entered into the order forms twice a month.
• Current POS terminals cannot report the daily sales directly to Zara’s headquarter automatically. Employees need to copy daily sales on floppy disk and bring it to the terminal with a modem to transmit sales information to headquarters.  
• Personal Digital Assistants (PDAs) are used primarily for ordering and also for tasks such as handling garment returns to distribution centers and transmitting information from head quarters to all stores.   
• Zara’s website exists but serves only a digital display window, showing a few typical garments at any time.

 Situation Assessment:

Zara is growing at a rapid pace, adding 24 stores from 2001-2002 in various countries. It has 531 stores in addition to distribution centers and Inditex headquarters. There is no reason to believe that this expansion and growth would cease in the near future. With this immense success, should company take the risk of having more issues later as it opens more stores?

The basis of this decision is not only about the cost for the change to the new operating system and risks associated with the existing outdated system but also about opportunity cost to be more effective and profitable. The company will need to evaluate cost and risks of the two alternatives.

Existing System and its evaluation:

Current DOS based POS system is functioning efficiently to fulfill today’s needs and employees are already familiar with this system.  Until 2003, there is no major cost foreseen for repairing or maintaining this system. The company can purchase extra DOS based POS terminals in advance in order to avoid the situation when the vendor does not offer them anymore. It allows Zara to open new stores and use these extra POS terminals without any delay.

There is no drastic change in the system as any major change could cause a domino effect. It can affect the company positively or negatively. If the POS terminal vendor suddenly starts making changes in the hardware, this can delay Zara from opening new stores as it prohibits the use of DOS. If the company continues with existing trend, this could end up costing Zara millions of dollars in lost sales.

Upgraded System and its evaluation:

Zara has another alternative to switch to the upgraded or new operating system. It has three choices for new operating system such as Microsoft, Linux or Unix. Zara does not have any cost hurdle to overcome and it does not use cost and benefit analysis for selecting new operating system. Their decision criteria should be to evaluate the cost of the three providers for each operating system. The cost for three operating systems per computer is: Window (€140 one-time cost and € 30 annually); Linux (€0 one-time cost and € 10-150 annually); and Unix (€160 one-time cost and €25 annually).  The hidden cost is also there in terms of employees training.

This option eliminates the risk involved with using an outdated system. New terminals enable the system to be networked not only within stores, but with other stores and Zara’s headquarters. There will be no need of PDAs. The terminals can handle returns as well as track the inventory with each transaction. There is no need of floppy disks and dialup modems. Sales can be automatically transmitted over the network to headquarter at the end of the day.

Recommendation:

After going through evaluation of two alternatives, I would recommend that Zara should continue with the existing operating system while building or upgrading the POS system. In order to address the needs due to fast growth trend, Zara should start planning to develop POS system for the long run. As the existing system functions smoothly and it is effective for running all stores and employees are familiar with this system, there is no rush to switch to new POS system immediately. Zara can hire IT specialist who can sit with Sanchez to develop POS application as per the company’s need.

They should also update their employees regarding new system and provide them the training. Any sudden change in the POS system can hammer the company’s growth and efficiency. Once they establish new POS system they should run it in a few stores for testing the system initially. If it works successfully they should adopt it for the rest of the stores.

Presentation:

If I were the consultant of Zara, I would analyze the current system and its limitations and threats and their impact on company’s financial standing. I would then explain why upgrading to the new system is necessary to keep up with the current technology trends. I would enhance my presentation using MS Powerpoint, Excel charts and tables and Visio diagrams to visualize process changes. I would then present the benefits of upgrading to the new system and how it will save the company money in terms of lost labor to do inventory and reporting financial data to the headquarter

Business Impacts of Visio

A picture is worth a thousand words. So is a flowchart. I realized the importance of flowcharts when I started working in UAE based Bank ABC. During the orientation and initial training, I was handed a 250-page folder containing Bank's policies, processes and guidelines for various tasks. Opening a new checking account, for example, was explained in details in several lengthy paragraphs. I was already lost after the 3rd paragraph since many of the steps were cross-referenced and were interconnected. Many of my fellow new-hires voiced the same problem. This also reflected in our job functions. Many of them were not following proper procedures when opening new accounts, home and auto financing, Letters of Credit, loans, etc. Some of these errors were minors whereas others caused major delays in completing customer applications. Department managers had to spend a lot of time revising and checking junior employees’ work for errors. Many of our clients were frustrated and the Bank was losing their confidence and their business.

A wake up call came when the auditors discovered some of these inefficiencies and certain employees’ non-compliance to Bank's policies and recommended procedures. A hefty fine of $75,000 was imposed on the Bank. To rectify the problem, our senior management decided to revise departments’ procedures and required all employees to go through quarterly trainings to get better familiarized with performing their job functions properly. This posed another problem that employees were spending significant time in trainings and started lagging in doing their daily jobs.

Since I had already shared my feedback after the first orientation and came up with a number of suggestions for training material, my manager commissioned me the task to conduct the training for my department. After doing some research for various options, I came across MS Visio. I found it an excellent tool for designing and documenting complex processes in an easy to read and understandable pictorial form. It comes with a wide selection of templates for various types of flowcharts that can be used for any department. It shares a common interface with the other applications in the MS Office Suite, and therefore much less of a learning curve is required to start using it. Dynamic data from other applications (i.e. Excel, Word, etc.) can be easily inserted into Visio diagrams to keep the flowcharts up to date with real time information. It has a very user friendly interface and offers a WYSIWYG environment to create diagrams and charts. It cost about $500 per license for MS Visio Professional and we bought 2 licenses.

I translated lengthy paragraphs into simple diagrams using some of the Bank’s custom images that the employees were already familiar with. I broke down complex processes into smaller, easy to understand and department specific flowcharts. After the trainings were conducted using Visio flowcharts, almost all of the employees reported a much better understanding of their job functions. They all printed flowcharts for their departments and kept them handy for quick reference. . I developed a flow chart for my department for opening the Letter of Credit (L/C) that I have attached for reference at the bottom.

After the quarterly performance review, not a single complaint was filed related to new accounts. There were no more errors and flaws in the procedures and the Bank regained customers confidence. This improved the overall process for each department and managers could now focus more on their jobs than micromanaging the junior staff. The end result was that my department alone reported an increased quarterly profit for $28,000 and an A+ rating after our next audit.