1. Information Systems: A Manager’s Guide to Harnessing Technology

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3. Chapter 3 Zara: Fast Fashion from Savvy Systems
A Zara store in Manhattan: Controlling the supply chain is key, Jennifer S. Altman

4. "you need to have five fingers touching the factory and Hve touching the customer." Translation: Control what happens to your product until the customer buys it. CEO Amancio Ortega

5. Learning Objectives
Understand how Zara’s parent company, Inditex, leveraged a technology- enabled strategy to become the world’s largest fashion retailer
Contrast Zara’s approach with the conventional wisdom in fashion retail - examining how the firm’s strategic use of information technology influences design and product offerings, manufacturing, inventory, logistics, marketing, and ultimately profitability

6. Learning Objectives
Detail how Zara’s approach counteracts specific factors that Gap has struggled with for over a decade
Identify the environmental threats that Zara is likely to face and consider options available to the firm for addressing these threats

7. Table 3.1 - Gap versus Inditex at a Glance

8. Why Study Zara? To understand and appreciate :
The counterintuitive and successful strategy of Zara
The technology, which has made all of this possible

9. Gap: An Icon in Crisis
Micky Drexler, the iconic CEO, helped turn Gap’s button-down shirts and khakis into America’s business casual uniform
Drexler’s team had spot-on tastes throughout the 1990s
When sales declined in the early 2000s, Drexler tried to revitalize the brand by filling the stores with teenage apparels
This shift sent Gap’s mainstay customers to retailers that easily copied the styles that Gap had made classic

10. Gap: An Icon in Crisis
Gap’s same-store sales declined for twenty-nine months straight, profits vanished
Paul Pressler, the new CEO shut down hundreds of stores, but it did not help due to bad bets on colors and styles
The marketing model used by Gap to draw customers in via big-budget television promotion had collapsed
In January 2007, Pressler resigned

11. Contract Manufacturing: Lower Costs at What Cost?
Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries can keep the cost of goods low
Contract manufacturing: Involves outsourcing production to third-party firms
Firms that use contract manufacturers don’t own the plants or directly employ the workers who produce the requested goods
Firms can lower prices and sell more product or maintain higher profit margins

12. Contract Manufacturing: Lower Costs at What Cost?
The downside of contract manufacturing
In order to have the low-cost bid, contract firms:
Skimp on safety
Ignore environmental concerns
Employ child labor
Engage in some ghastly practices

13. Contract Manufacturing: Lower Costs at What Cost?
Firms that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may:
Turn off customers
Repel new hires
Leave current staff feeling betrayed

14. Don’t Guess, Gather Data
To make sure that the stores carry the kinds of products customers want, Zara managers ask the customers
Zara’s store managers are armed with personal digital assistants (PDAs) that can be used to:
Gather customer input
Chat up with customers to gain feedback on what they’d like to see more of
Incentives for success—as much as 70 percent of salaries can come from commissions

15. Don’t Guess, Gather Data
Staff also checks for customer preferences by looking at unsold items
PDAs are linked to the store’s point-of-sale (POS) system
Point-of-sale (POS) system: A transaction process that captures customer purchase information, showing how garments rank by sales
Managers can send updates that combine the hard data captured at the cash register with insights (soft data) on what customers would like to see

16. Don’t Guess, Gather Data
All of this valuable data allows the firm to plan styles and issue rebuy orders based on feedback rather than hunches and guesswork
The goal is to improve the frequency and quality of decisions made by the design and planning teams

17. Design Zara designs follow evidence of customer demand
Zara design staff consists of young and fresh designers from design school
Teams are regularly rotated to:
Cross-pollinate experience
Encourage innovation

18. Manufacturing and Logistics
The average time for a Zara concept to go from idea to appearance in store is fifteen days versus their rivals who receive new styles once or twice a season
The firm is able to be so responsive through:
A competitor-crushing combination of vertical integration and technology- orchestrated coordination of suppliers
Just-in-time manufacturing
Finely tuned logistics

19. Manufacturing and Logistics
Vertical integration: When a single firm owns several layers in its value chain
Value chain: The set of interdependent activities that bring a product or service to market
Nearly 60 percent of Zara’s merchandise is produced in-house, with an eye on leveraging technology in areas that:
Speed up complex tasks
Lower cycle time
Reduce error

20. Manufacturing and Logistics
Inventory optimization models ensure that each store is stocked with just what it needs
Zara leverages contract manufacturers to produce staple items with longer shelf lives, which account for only about one-eighth of dollar volume

21. Manufacturing and Logistics
Ceiling-mounted racks and customized sorting machines patterned on equipment used by overnight parcel services and Toyota-designed logistics, whisk items from factories to staging areas for each store
Clothes are ironed in advance and packed on hangers, with security and price tags affixed
Trucks serve destinations that can be reached overnight, while chartered cargo flights serve farther destinations within forty-eight hours
Zara is also a pioneer in going green
Introduction of biodiesel for the firm’s trucking fleet

22. Stores Running out of bestsellers at Zara delivers several benefits:
Allows the firm to cultivate the exclusivity of its offerings
Encourage customers to buy right away and at full price
Encourages customers to visit often
Reduces the rate of failed product introductions

23. Technology ≠ Systems. Just Ask Prada
Zara’s IT expenditure is less than one-fourth the fashion industry average
Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact
Zara makes sure that every dollar spent on tech has a payoff

24. Technology ≠ Systems. Just Ask Prada
The Prada example offers critical lessons for managers:
Getting the right mix of the following five components is critical to executing a flawless information system rollout:
Hardware
Software
Data
Procedures
People
Financial considerations should forecast the return on investment (ROI) of any effort
Designers need to thoroughly test the system before deployment

25. Moving Forward
Zara’s value chain is difficult to copy, but it still has challenges to face
Limitations of Zara’s Spain-centric, just-in-time manufacturing model:
If problems occur in northern Spain, Zara has no other fall back
The firm is potentially more susceptible to financial vulnerabilities as the Euro has strengthened relative to the dollar
Rising transportation costs
Zara’s financial performance can also be impacted by broader economic conditions

26. Moving Forward
Zara’s value chain is difficult to copy; but it is not invulnerable, nor is future dominance guaranteed
Zara’s management must
Have an understanding of how information systems can enable winning strategies
Scan the state of the market and the state of the art in technology, looking for new opportunities and remaining aware of impending threats

27. Let numbers speak for themselves
The chain’s profitability is among the highest in the industry.
“the most innovative and devastating retailer in the world.”
High fashion but are comparatively inexpensive (average item price is $27)
Legions of fans eagerly await “Z-day,” the twice-weekly inventory delivery.
Managers are motivated because as much as 70 percent of salaries can come from commissions.
Postponement strategy: Roughly half of the cloth arrives undyed so the firm can respond as any midseason fashion shifts occur. (e.g., Acer PC CPU, Beer labeling)

28. Clothes are ironed in advance and packed on hangers, with security and
price tags affixed. Store staff regain as much as three hours in prime selling time (per day?).
While running out of bestsellers might be seen as a disaster at most retailers, at Zara the practice delivers several benefits.

29. From concepts to products
Attributes
Competitors
Zara
New Items Designed
2,000~4,000 (H&M,Gap)
30,000
From concepts to products
3~5 months (H&M), 6 months (Gap) , 9 months (others)
15 days
Manufacturing
No factory (H&M)
60% produced in house
Batch size
Hugh batch size “everything is the same” (Gap)
Small batches “You’ll never end up looking like someone else.”
average markdown ratio
approximately 50%
15% (85% full price)
# of store visit per year 3 17
Marketing /Revenue ratio
3.5%
0.3%
Failed product introductions
10% 1%
gross margins
37.5%
56.8%
IT Investment
¼ of the industry average
Stores
3,076 stores WW with 2,551 in US (Gap)
3,900 stores across 70 countries.

30. Technologies Deployed and Information Gathered
personal digital assistants (PDAs)—handheld computing devices
PDAs are also linked to the store’s point-of-sale (POS) system
Looking for evidence in the piles of unsold items that customers tried on but didn’t buy.
Zara designs follow evidence of customer demand.
Computer-controlled machine cutting tools
“The success of the model lies in being able to adapt what you’re offering in the shortest time possible to what clients want. For Inditex, time is the principal factor to take into account, more so than the costs of production.”

31. Close the communication loop: Customer  Store Manager/staff  market specialists/designer  Production staff  Buyer  Subcontractor  Warehouse managers/distributor
Separate design, sales, and procurement and production planning
staffs are dedicated to each clothing line (Men, women, and children).
Zara's cadre of 200 designers sits right in the midst of the production process
End-to-end control of supply chain.
Reduce the supply chain cycle time: Speed and responsiveness
Supply chain flexibility: Most garments come with five to six colors and five to seven sizes, Zara's system has to deal with something in the realm of 300,000 new stock-keeping units (SKUs), on average, every year.

33. Bullwhip Effect in Supply Chain
Main information flow
Physical flow

34. Demand-Driven Supply Chain
ERP
SCM
SCM
CRM

35. Increasing Variability of Orders up the Supply Chain
Bullwhip effect -the tendency of supply chains (and all open-loop information systems) to amplify small disturbances.
Increasing Variability of Orders up the Supply Chain
The Bullwhip Effect in Supply Chains, Hau L. Lee, V. Padmanabhan and Seungjin Whang, Sloan Management Review, April 15, 1997