Zara: IT for Fast Fashion

Problem/Issue Statement

Xan  Salgado Badas (head of IT for Inditex) and Bruno Sanchez Ocampo (technical lead for the point-of-sale system) are both concerned that the current POS infrastructure for its largest chain of stores Zara may be outdated and a risk for the company.  Although Salgado is arguing for retooling the current operations and Sanchez is opposing the notion, both men have taken each side of the contention at various times.  While the current system appears to be working, it is running on DOS, an operating system that is no longer supported by Microsoft.  Additionally, although DOS is currently is compatible with the terminal hardware may not be in the future and the hardware endor is not willing to contractually commit to insuring future compatibility with DOS.

The main problem is that the current IT structure, a custom software application written on top of DOS, is both outmoded and limited in its capabilities, and represents a significant risk to the company should its terminal hardware no longer be able to support the archaic operating system.  

Some of the symptoms of this problem are the inefficiency created by running an older system, such as the inability of employees to look up their own inventory or other store’s inventories in real time or spending excessive time to complete returns on the small screens on their Personal Digital Assistants (PDAs).  

The scope of this problem is the entire chain of operations related to Inditex’s Zara fashion stores, from the vendors to the  warehouses and distribution centers to the actual store properties.  The POS system impacts the way each part of the chain interacts with one another and an upgrade would significantly alter those relationships. 

Situation Assessment

The Zara fashion stores rely on the speed of their product, needing the latest fashion products to satisfy the needs of their customers.  Ideally, an IT system in place would be able to track all changes in inventory throughout the 500+ stores and manage this updated database in real time.  The company maintains a website, but does not allow for the sale of clothes through this site, primarily since the return rates for online sales of clothing are much greater than those in the physical retail locations.  The company is averaging an opening of one store per day and is considering further expansion globally and especially into European markets like Italy where only 3 Zara locations exist but there is potential for a much greater presence.  When a new store is opened, all the manager needs to do is insert two installation floppy drives into each terminal that contain DOS and the required applications. If anything were to malfunction with the POS terminal, a reinstallation was very straightforward and consequently no IT support was required to open a new store or was there any need for a large IT support assistance organization.  In the event of a serious problem with a POS terminal, a complete software reinstallation was similarly straightforward. As a result, no IT support was required to open a new store, nor was it necessary to run a large IT support organization to assist the stores. The POS system in place is expected to support further expansion if hardware vendors maintain its compatibility with MS DOS.

The decision criteria for a new POS system are would it maintain the operational status quo and not cause any disruptions in current operations, how easily it can be installed and managed by each store, how much time it can save by adding greater functionality, would it protect the company against the risk of maintaining obsolete and resulting incompatible technology, and would it fit in with the current business model of Zara’s such as the great autonomy given to managers and the consistent expansion into global markets. 

List of Plausible Alternatives and Evaluation of Alternatives

The first option is to maintain the status quo and maintain the current system in place.  Within this option would also be the choice as to whether or not to purchase additional units of the existing POS terminals to offset the risk of the vendor no longer supporting DOS.   This choice would be an antiquated one, and seek to keep tasks such as updating inventory a manual one.  This would require no immediate investments in training employees on a new system, programming POS terminals or applications on those terminals, and there would be no time where operations must be limited or delayed to accommodate these upgrades.  This would put the company at risk of lagging technology, even if they were to purchase a large amount of terminals that could ultimately become incompatible with necessary peripheral devices. This option would keep the stores isolated from one another with the exception being the one modem in each locale.  No new functionality exists with this alternative.

The second alternative is to upgrade and add functionality to the POS terminals by integrating a new operating system, primarily Windows, Unix, or Linux.   Inditex could update the POS applications to incorporate the functionality and allow the store personnel to use a large screen, keyboard, and mouse to quickly execute return transactions.  The company could build wireless networks within and between stores so that installation through floppy disk would no longer be necessary and with each location connected to the Internet, each store could know the theoretical inventory of its SKUs (stock keeping unit or the combination of garment, fabric, color, and size).  This would require  a sizable investment. To port the existing OS in DOS to a new OS would require 15,000 hours of programming time at a rate of 450 Euros per day, or 5,000 Euros to expand the current POS application.  Each store would need to allocate 32 hours to the installation of the new OS system, establishment of a wireless network, and training of staff on the new system at a rate of 2,000 Euros per day.  This would, though, mitigate the risk of obsolete technology, add greater functionality to store operations through completely updated information such as inventory head count, and even allow for the possibility of online clothing sales which could generate significant revenue and now be possible to handle since returns would be significantly less difficult through new allowable processes free of previously requisite PDA devices.  

Recommendation

I would recommend that, although the investment figures induce sticker shock at first, the company migrate to a new OS system and establish wireless networks within and between stores.  The instinct to uphold the status quo and resist technological change is one that will limit Zara’s growth potential both in its existing stores and its future expansion.  Ultimately, a POS system running on DOS is limited in how much functionality it can provide to retail stores and the distribution network.  Being able to access real time information and having all stores be connected to each other and the corporate employees is invaluable.  Eventually some portion of the POS system will become completely outmoded and a DOS operation will not be able to fully interact with some peripheral or necessary application.  To stave off the staggering loss that will accompany the inevitable phasing out of DOS compatibility, Inditex must endure the up front investment cots of modernization and update its current systems. 

Presentation

The consulting group must keep in mind the context of Inditex’s situation, understanding that the company is generally located in Europe with a slight presence in global markets and is seeking significant expansion.  The presentation should anticipate future changes in the market and do the difficult task of accounting for the accountable by assuming how unexpected further technological changes and the current POS system or an updated one could handle market adjustments.   The presentation would benefit greatly from a solution that might not just be a full upgrade, but rather a sampling of the updating opportunities such as further developing the custom OS application and establishing wireless networks. Lastly, the presentation should give a fair representation of the benefits and drawbacks of either keeping the current methodology or updating to a new OS and wireless networks.   

Reflection 

Mr. Sánchez and Mr. Salgado,

I have concluded that despite the insistence by the consultants in last night’s presentation that the responsible choice would be to port our POS application for our terminals to a Linux operating system, that at this time a full-scale upgrade from DOS would be too costly and risky considering our business model and current healthy IT system.  Over the past seven years we have been able to grow our operating revenues by nearly 3 billion Euros and multiplied our net income by a factor just over 6 under the support of our current legacy DOS-based terminals.  I am forced to disagree with the consultants’ notion that porting to a Linux OS and installing wireless networks would provide a degree of functionality that would dramatically improve our company’s bottom line.  Zara’s business model relies on responding to fashion trends and quickly overturning each retail location’s inventory, and the value of maintaining an immediately accessible and completely exact inventory figure is definitely a benefit but not a necessity. 

I must admit that my preparation thoughts were more aligned with what was presented to us then what I am now recommending.  I originally did propose that in order to stave off the significant losses associated with the terminal vendor phasing out DOS compatible terminals, we should make the sizable investment to migrate imminently to a new OS.  This was an argument that the consultants made, warning us that our current expansion rate of a store a day could be completely halted if our terminal vendor decided to no longer supply us with terminals that were DOS compatible.  At the time of my writing this I was largely concerned that our terminal vendor would not contractually obligate to continue distributing DOS-compatible systems.

However, upon further consideration, I now realize that what you suggested, Mr. Sánchez, would be a much more reasonable approach.  We could purchase a supply of the current terminals and if our supply vendor were to no longer offer devices that supported DOS, which they have actually assured us would not occur, we would then “have plenty of breathing room to port the application a new OS.”  The consulting team did make sense, though, in noting that we are the only customer of our vendor that operates in a DOS environment that it does seem like an inevitability that DOS will become outmoded.  To address this, I propose that we begin the work necessary to rewrite our application terminal software so that it can be used on a new operating system.  This would require an approximate programming time of 15,000 hours, and if the estimate given by the consultants of a 1 year time frame for implementation of their solution is accurate and relevant, then we should begin this initiative as soon as possible.  Once the programming is completed, we can then begin on a trial basis switching a sample of our retail outlets to a new OS, possibly the Wincor Nixdorf TPLinux the team proposed
. 

Although the consultants’ presentation was very thorough and extremely detailed as to the specifics of the proposal (with the exception of the ambiguity of the exact fees associated with installation and support of a Wincor Nixdorf solution), I must come down on the side of conservatism.  Our current business model can be seen in our operating expense figures in comparison to one o f our largest competitors.  In 2001, Gap was able to achieve operating profits of 379 million Euros from a gross margin of just under 4.7 billion Euros and Inditex was able to generate over 300 million Euros more in operating profits from a gross margin under 1.7 billion Euros.  To an outside observer, our IT infrastructure may seem antiquated, however it is one of the many reasons that we have been able to keep our operating expenses to a minimum and enjoy such healthy growth in profits.  By preparing ourselves for the future by beginning to program our terminal application for a new OS, we can cautiously modernize without creating any great disruption to our 1,558 locations worldwide.