Zara - a Retail Store Case Study

Table of Contents

Executive Summary        

Issue Identification        

Root Cause Analysis        

Value chain Model        

Cost Analysis        

Alternatives        

Decision Criteria        

Alternatives        

Alternatives Evaluation        

Recommendations        

Implementation        

Monitor and Control        

Appendix A        

Executive Summary

Zara is a retail store of the Inditex group that started in 1975 and has now grown to 531 stores. Zara’s strategic business model focuses on product variety, speed to market, and store locations. The main business idea behind their model is to link customer demand to manufacturing and manufacturing to distribution which they have accomplished through vertical integration.

Zara is currently facing the decision to either implement a new operating system or to continue to use the DOS operating system which is no longer supported by Microsoft. In this report we evaluate Zara’s current strategic focuses and evaluate the value chain model. We also take a look at the cost of implementing the new operating system.

Alternatives whether to update the operating system, maintain the current operating system, or create an operating system in house are discussed by determining the pros and cons of each solution. A recommendation is given based on the decision criteria to focus on speed to market, connectivity, communication, and reliability to update the operating system.

Implementation is not urgent but would be recommended to start in the short run as the benefits to the recommendation show an increase in overall productivity and communications within the company that would transfer over to increase profit margins and revenue.

Issue Identification

Zara is a retail store of Inditex Group, a clothing company, founded by Amancio Ortega in 1975. He opened the first Zara shop to free up capital by using a big order that had been canceled with no other buyer, to stock the shop. Other stores owned by Inditex Group include Massimo Dutti, Bershka, Pull and Bear, Stradivarius, and Oysho. Today Zara has 531 stores with majority located in Europe. Their main competition includes companies such as The Gap, H&M, and Benetton. The success of Zara has come from its vertically integrated supply chain structure and the close communication loop that it entails. It would prove difficult to duplicate the business structure of Zara exactly but other companies could learn from the company’s strategic model.

Main Issue

The main issue Zara is currently facing is whether to continue running their POS systems and terminals using DOS or to upgrade to a new operating system such as Windows, UNIX, or Linux. Currently Zara is the only company still running their POS systems using DOS which is no longer supported by Microsoft. Another reason this is being discussed is although the vendor of the POS systems said they had no plans to create a machine that is not compatible with DOS, the terminal maker provide no assurance to this matter.

If Zara decides to switch operating systems it would require new hardware, operating system, and high-speed internet connection for all 531 stores.  A highly trained IT department would be needed to implement and switch over to the new system and to train employees. An increase in the operating costs of each store would also occur due to the annual maintenance fees charged for each POS terminal in operation. Should Zara switch their outdated technology even though it is currently working for them? Here are issues they need to account for in the short term and long run in the decision to upgrade software or not.

Short Term Concerns

1. Current ordering structure requires several people to use handheld devices and physically walk around the store to determine what needs to be replenished. Store Managers are not currently able to look up inventory balances to determine these replenishment quantities by using an in-store computer since the DOS system does not offer this capability. Inventory management is manual
2.  POS systems are not connected to the distribution centres for submitting their replenishment of stock.
3. Viewing newly available garments is done on handheld devices that need to be connected to a dial up modem to transfer information from head office.  
4. Sales and other data cannot be sent straight to Zara’s headquarters with the DOS system. Daily sales totals from each sales terminal need to be transferred onto a floppy disk which is then transferred to the head office via dial-up connection.
5. The current operating system is working for Zara and has proven to be stable effective, easy to roll out and maintain over time. It requires little IT support to open new stores and IT support is directed to the IT department who is familiar with current software.

Long Run Concerns

1. Theoretical inventory is not 100% accurate if shipments and sales are not recorded perfectly. This data is used to help make allocations of shipments to stores.

1. If the DOS system becomes incompatible with POS systems and terminals Zara would not be able to open any new stores until the IT department found a solution to solve the compatibility issue between old software and new software.
2.  Upgrading to a new operating system would be costly and time consuming to implement and my risk the reliability that the current system offers. Zara may need to outsource their IT department to new service provider.

Root Cause Analysis

Overall Company Strategy

Zara’s strategy is product variety, speed to market and store locations. Zara’s business idea is to link customer demand to manufacturing and manufacturing to distribution. An important aspect of Zara’s business model is to be able to respond to the rapid changing fashion trends and demands of the industry. Zara’s target market is young, fashion conscious city dwellers, and the goal is to respond quickly to this target’s demand. Zara designs, manufactures, and distributes approximately 11,000 new low-cost designs each year, in small batches. It can put out a new design from concept to store in 10-14 days in an industry with an average of nine months. Zara continues to expand by opening new stores all over the world. Zara needs to decide if they want to keep building a bigger company on top of an obsolete operating system.