Zaras Supply Chain Managment Essay Example for Free

Zaras preparation Chain Managment EssayAbstractThis causal agency quiz provides a vexation analysis on Zarathe most profitable and well-known de pass judgmentd elbow room post under the worlds largest room distri hardlyor Inditex Group. The analysis pull up stakes evaluate Zara by exploitation Porter lays, looking at its Supply Chain Management and defining its current IT ch all toldenges. Then, the essay leave alone discuss the woos and benefits of upgrading to the pertly OS bodys. The essay allow give recommendations on whether Zara should ascension its POS terminals afterward considering all above factors. Case SummaryFounded by Amancio Ortega, the richest man in Spain and its voluminousgest sh beholder, Zara is a clothing and accessories retail merchant that opened its first store in La Co livea, Spain in 1975. Zara has been operated under Inditex Group, the worlds largest fashion distributor, since 1985. Zara was originated on a simple business vagary e xplained by the CEO of the fellowship Jose Maria Castellano Rois who get together Inditex in 1997 that Link customer deal to manufacturing, and link manufacturing to distribution. (McAfee, Dessain, Sjoman, 2007) As a flagship chain store of the company, Zara plays a very important habit in the Inditex Group. By 2003, Inditex has 1558 stores in 45 countries which nearly one threesome of them were part of the Zara Chain. For the fiscal course of study of 2002, Inditexs net income was posted as 438 jillion on 3,974 billion revenue, which Zara alone generated nearly three quarters of sales. Women clothing accounts for 60% of Zaras sales, and Mens and Childrens segment each accounts for ab forbidden 20%. (McAfee, Dessain, Sjoman, 2007) Zaras transaction musical arrangement is very critical.Compargon to some other(a) companies that it takes them about six months to develop a product and preserve it to the store, Zara only penurys three calendar weeks to smash the entire procedure. And Zara launches about 11,000 garment features on average each year. (Business Week, 2006) Only the fast tackedness of Supply Chain Management (SCM) fanny assure Zara to respond very quickly to the demand of target customers who argon young, fashion-conscious urban center dwellers. And to reach its conclusion to quickly respond to customer demand, Zara developed three cyclical functioninges from order of magnitude to fulfillment to design and manufacturing. Zaras Information engine room has matches its preferences for speed and decentralized decision-making. in that respects no CIO deep down Zara, but instead, Salgado and Castellano are on board of the technology committee who sterilises decisions around IT.Due to Zaras business uniqueness, most of its IT operations are established internally by its IS department rather than misdirecting commercially available software or outsourcing. At August 2003, Salgado and Sanchez must make a decision on whether Zara should ascent its operating ashes or not. In every Zara store, in that location are basically cardinal technological frames that are officePDAs (short for Personal Digital Assistant) and POS (Point of Sales) terminals. PDAs are handhelds that were used primarily for ordering and were upgraded constantly.POS terminals are cashier computer organizations with Zaras own application installed and had remained unchanged for oer a decade. Zara, at 2003, was victimization the nation operating system that was no longer controled by Microsoft. The POS application that was ran on screen of the DOS system worked very fine and efficient for Zara so Sanchez insists on not changing it. Salgado, on the other hand, thinks that in that location are potential puzzles with the outdated system and there are rooms for progress if they upgrade it with a stark naked(a) system. As utmost as the debate could go, the two men assume to agree on a decision and come up with a solution for this chall enge.Business epitomeTo process Mr. Salgado and Mr. Sanchez to solve this tough problem, we need to firstly understand Zaras business model. I testament use Michael Porters Generic Strategies, five dollar bill Forces and abide by Chain to analyze Zara Company.Generic schemaAmong the three generic business strategies Dr. Porter identified, which are (1) broad damage leadership, (2) broad differentiation, and (3) focused strategy, I think Zara inherited both cost leadership strategy the differentiation strategy. Zara specialises itself from the rest of the clothing constancy not only by extending unique products but also by having full realise of its operation processes. As Daniel Piette, LVMHs fashion director, described as Possibly the most innovative and scourge retailer in the world, Zara truly has its unique business philosophy. (CNN Business, 2001) Zara meets its customers expectation by delivering the latest fashion lines at affordable tolls the soonest it stern. This concept itself is unique enough. Unlike extravagantly-end designer brands that offer limited grievous bodily harm lines at big prices, or like some other clothing retailers that offer trendy styles at embarrassed costs but poor qualities, Zara is able to bring the new-fashionedest fashion into mass output and deliver them to people with a conventionalism quality for very good prices.While most of the clothing or textile companies aver on outsourcing and cheap labors from China, Zara established a vertically integrated operation system. (Osterwalder, 2005) guest demands are Zaras heavenly goal, and Zara collects them from its stores throughout the world. Zara has its own commercials that make decisions on what to design and produce. Zara owns a root of factories around La Coruna and near Spain to finish manufacture and production quickly. Zara is able to use this network to ingrain a new design from concept through production and into the Distribution Center in as litt le as three weeks. And deliveries to the store usually take only one to two days via various transportation methods. Jeffrey Ballinger, a Harvard researcher and director of pressure group Press of Change, said that. Zara has sour control over garment factories into a war-ridden proceeds. (CNN Business, 2001) Zaras differentiation strategy results in a low cost strategy.Zara uses a low cost structure than its competitors to cut cost. Unlike fashion brands that creates or used well-known designers or design groups that cost millions of dollars, and produce with exotic, rare to go back fabrics. Zara takes its designs from its commercials and use late to find textile to not only react to changes quickly but also cut the legal age of the cost, therefore, Zara merchant ship always offers a lower price. Zaras generic strategiesboth differentiation strategy and low cost strategy are due to Zaras stopping pointness to its customers. Zaras designs are generated from preferences colle cted in the store, and Zara is able to satisfy its customer by taking full control of the operation process and therefore, fulfilling customers demand quickly. The skill to transform this close relationship into a take to be proposition gives Zara complete advantage over its competitors. (Osterwalder, 2005)Five ForcesMichael Porters Five Forces tush be used to identify Zaras competitive forces within the environment to assess the potential profitability in the clothing retail indus get word. According to Paige Baltzan, Five Forces purpose is to combat these competitive forces by identifying opportunities, competitive advantages, and competitive intelligence. If the forces are strong, they can increase competition. (Baltzan, 2010) Below, I entrust discuss Zaras fight from the five forces.1, Buyer Poweris the ability of buyers to affect the price they must pay for an item. (Baltzan, 2010) Buyer power is not very strong in Zaras content. nodes who buy from Zara know exactly what kind of merchandises they are purchasing from this brandtrendy cool items with a normal quality for a good price. Since Zara has 531 stores over the world, it has a large number of customers. Since Zaras garments brook plum short life spans (McAfee, Dessain, Sjoman, 2007), it creates a sense of urgency for customers. Customers know that if they dont buy the item this conviction because they are hesitating on the price, they may not even be able to find it next time they visit the store. This gives Zara power to name its own price, but of course, within a fair(a) Zara price range. Although there are brands like Gap, HM, Benetton and so on to compete with Zara, the unique fashionable items that are offered at Zara, which change constantly, makes the switching costs high for Zara. There are definitely loyalties in Zaras customers who check out the store ofttimes hunting for new items as soon as they are available.2, Supplier Powerconsists of all parties twisty, directly or indi rectly, in obtaining raw materials or a products. (Baltzan, 2010) Zaras operation structure gives it a comparably lower supplier power. Clothing retail industries rely on their manufactories to produce their garments, so usually their suppliers have high bargaining power. If the price of cotton goes up, the whole industry is likely to be influenced and therefore, their cost forget go up, their merchant price result coat as well. However, since Zara owns its factories, Zara is its own supplier. Supplier power is comparably lower than its competitors.3, Threat of Substitute Products or assistis high when there are many alternatives to a product or service. (Baltzan, 2010) The thread of substitutes is low for Zara. horizontal the fashion industry is very unpredictable and Zara has a lot of competitors wanting to make the next big fashion trend, Zara is still distinctive because it is known for constant innovations and designs for the latest fashion. No competitors of Zara could ca tch up its speed on producing so many items a year and deliver that fast.4, Threat of New Entrantsis high when it is calorie-free for new competitors to enter a market. (Baltzan, 2010) The enter barrier to create a company that is similar to Zara is high so the threat of new entrant to Zara is low. Profitability always attracts investment to enter the industry, and in fact, there are new entrants all the time. However, Zaras business model is quite unique and difficult to copy. Zara has already built its reputation, and is the leading company in the industry. It will be hard to achieve what Zara has. It also takes time and capital to establish a successful company like Zara. It is hard to gather all the resources including quick people like what Zara has to create an industry giant. There are going to be some threats of new entrants but not that big of the influence to Zara.5, Rivalry among Existing Competitorsis high when competition is fierce in a market. (Baltzan, 2010) Since t here is not many similar fast fashion stores in the market, Zaras argument is low among existing competitors. Zaras existing competitions come from sharing the same clothing retail industry, but not so much from what Zara is specialized infast fashion. So again, Zara distinguishes from other competitors for its products and speed, and so far competition for Zara is not that fierce within the market.Value Chain AnalysisSupport Value ActivitiesValue AddedMichael Porter created value chain analysis to identify competitive advantages by viewing a starchy as a series of business processes that each adds value to the product or service. (Baltzan, 2010) By identifying Zaras value chain, we can determine the ways in which Zara can implement IT or add value to its products and services.Primary Value ActivitiesAs it was described in the case, Zaras primary value activities are Ordering, Fulfillment, excogitate and Manufacturing, Distribution and Store Operations. Store managers at Zara pla ce an order to La Coruna twice a week encompassing both replenishment of existing items and initial requests for newly available garments. Commercials at La Coruna whence fulfill and ship clothes to stores to satisfy their orders. Zara has its own team of design who amazingly produce approximately 11,000 new items a year. Zara also has a vertically integrated manufacturing operation system that moves its design to production quickly. Zaras distribution center then transport and distribute Zara products to stores. Zara stores are responsible for selling items and store customer preference for fashion trends. These primary activities consist all basic business activities happen within the company everyday.Zaras Support Value Activities, like many other companies, are Administration, Information Technology, clement Resources and Procurement. Zaras approach to IT is consistent with its preference for speed and decentralized decision making. (McAfee, Dessain, Sjoman, 2007) IT team, who creates most of the applications that Zara uses internally, supports Zara to function the trump way it can and supports well. Zaras IT is used in store operations, logistics, administrations and so on. It has reduced the overhead cost in many areas, and therefore, has helped Zara to achieve a cost advantage.Implementations of Porter ModelsZara differentiates itself from the rest of the industry for its concept of fast fashion at an affordable price. And this is done and supported by not only Zaras sharp employees such as powerful store managers and commercials but also by the IT Zara employs. Information plays an important role through Zaras show chain management. Information of customer preference was collected from the store and transferred to commercials so that they can generate the right products quickly. Information of SKUs (stock-keeping-units) was communicated so that the Distribution Center knows what to replenish to stores twice a week. IT adds value to Zara in almo st every primary and supportive activity in the value chain. Zara used IT in terms of functional processes and decision level.Even Mr. Sanchez states that the current system is stable, effective and easy to use, there are still many potential risks and problems and there is a big room for Zaras IT to change so that the operation could perform even better. Zara POS terminals are run on DOS operating system that is not supported by Microsoft any much. Zara also uses the PDAs to make orders and handle returns. (McAfee, Dessain, Sjoman, 2007) As important as sales information is, Zaras POS terminals were not connected to one another via any in-store network, so employees have to transport all the information on a disk and to the one modem-equipped terminal to accomplish transaction.This process is inefficient and has many potential risks of losing the information. PDAs also use the same terminals modem to receive the offer and transmit the order. Within a store, POS terminals and PDA s could not dowry information. That being said, one the terminal modem is dead or has some kind of flaws, the whole store operation will be delayed or stopped. Then, Zara will lose its competitive advantages from its five forces in the market and less value will be added to the value chain. As a result, its generic strategy wont work as well.Solution military ratingThe question is should Zara choose to upgrade its POS system? Nicholas G. Carr explained in his article It Doesnt Matter that IT has lost its ability to create a sustainable competitive advantage and suggested companies not to try new technologies but embody the ones that have been tested to reduce risks. (Carr, 2003) But from the study of all publically traded companies in the article invest in the IT we learned that there is an industry concentration that large share of the market is concentrated from a small number of companies. (AcAfee Brynjolfsson, 2008)As where Zara stands in the clothing company, it definitely doesnt want to lose its competitiveness as one of the small group of companies who hold a large piece of pie from the market. The case problem is a semi-structured one since we only know some of the valuables and it is hard to measure the proximo value of the result. irradiation Drucker said that If you cant measure it, dont do it. Within Zara company, Salgado and Castellano were only involved early in discussion of initiative that might include computerization. They only determine what new system there is department should purchase or who should work on them without further conductions for cost/benefit analyses. However, I will give a financial forecast using the numbers given in the case to show whether upgrading the system would add value to Zara or not. equal analysisFrom Exhibit 13 of the case, we can collect some data and ideas of how much it will cost Zara if it decides to upgrade the system. The company can try the new system in a few stores first to test the efficiency. H owever, my calculation is based on installing the Windows Operating System throughout all 531 Zara stores average five terminals per store within a year. (Despite new store openings) congeries cost to purchase and maintain the Windows OS system per terminal is 170. computer hardware required to install in the store including POS terminals, wireless router and wireless Ethernet card cost 5,430. High-speed profits connection will cost 240 per store annually.Time required per store to install new POS terminals with new POS application, establish wireless network and train staff is 32 hours, which convert to four days of work. Cost per day will be 2,000 times four days, and that gives 8,000 expenditure per store. So, total cost per store to all told install the new OS system with new POS application ready to perform daily tasks is 14,520. Total programming time required to port existing POS application to new OS and expand POS application to include some new features is 20,000 hours. Assuming that computer programs can be run on the machines 24 hours a day, each day cost 450, total cost will be 375,000. As a result, 531 Zara stores will cost 7,710,120 to install the program, plus 375,000 expenses from the IS department, total cost to upgrade the POS system will be 8,085,120. (See Exhibit 1)Since Zara generated 73.3% of the Inditex Groups sales, Zaras Net Operating Revenues can be estimated at 2,913 million in 2002. And assume all companies under Inditex Group operate in the same way and share expenses equally as sales, Zara will make 313.8 million Net Income. (See Exhibit 2) The 8 million upgrading expenses will count for a 3% investment for Zara.Benefit AnalysisA 8 million IT upgrade is not a small investment, we need to look at potential benefits that can be do out of the system to measure if it makes a profit for Zara. In another word, we need to forecast future returns to see if the new system will add value to Zara or not. I will use some Key Performance Indicators (KPI) and some Critical Success Factors (CSF) to analyze the outcome.Financial ForecastThere are some tangible KPIs we can measure to see if Zara benefit from the new system. I will use Revenue, number of garment, percentage of time saved using the new system as my KPIs. every(prenominal) business is about making money. If the new system cannot bring Zara extra revenue, why invest? allows suppose that the system runs smoothly and well once it is installed. Hopefully it will link up the POS terminals and PDAs that are used in each store to headquarter automatically using the wireless Internet. Added new features are supposed to enable staff to check theoretical inventories from the store as well as all other Zara stores near it. The system will minimize faulty transactions from human errors. Staff in the store does not have to record sales numbers and transport it from one terminal to another. more(prenominal) information from customers and store managers can be collect ed and sent back to commercial teams quicker and more accurately. Distribution Center will be able to see store inventories from the system simultaneously so replenishment can be made without making an order. Shipment can arrive more frequently to the stores. Lets say the system accelerate the whole operation process by 10% of the total time, and the design group is able to make 10% more garment items a year due to the time they saved. That will make a total of 12,100 items a year compared to 11,000 before. Revenue can be increased to 3,204.23 million from 2,912.94 million. Although the number may be too positive, it gives us an idea that multi-million of revenues can be made due to the increased efficiency of the system.Another important fact is that the new system installed will last for a period of time, not just one year. The current DOS system has been used for over a decade, and I believe the new system can be run for about the same period. The IT investment expenses can be di stributed over the next few years and Zara will continuously benefit from the uses of the system.Other benefitsThere are also some intangible values that can be added from the new system. Some Critical Success Factors include market competitions, Supply Chain Management, Customer Relationship Management and Material Resource Planning II.The new OS system will help Zara to be competitive in the industry. As an innovative company, Zara has its unique and simple business model that has a proven success. The IS department of Zara that create program application for Zara to use is a valuable Proprietary Technology benefit that Zara owns. It is beneficial because no other competitors have access to the technology. Infrastructural Technology such as this DOS or new OS system has better value when more users are taking advantage of it. (AcAfee Brynjolfsson, 2008) Zara should take the advantage by also applying the new OS system as many other competitors in the industry have already used it . Thus, Zara will have both benefits from both trademarked and infrastructural technologies and stay competitive in the market.New OS system will link Zaras supply chain better and faster. Zaras business model decides that the company wants to exchange information and it wants the information to be exchanged fast. Zaras supply chain golf cerebrate from Supplier to Manufacture to Distributor to Stores and to Customers are tighter than many other companies because its products turn over more frequently. Zara needs a good system to perform operation than any other companies. Having an upgraded system will help Zara to achieve its business goal.New system will bring more customer satisfaction to Zara. A lot of Zaras customers have some degrees of committedness to the company and their satisfaction is important to Zara. Despite chatting with customers for their fashion sense when they are in the store, Zara doesnt make much networking effort with customers. Product says it all. Zara s imply keeps its customers coming by offering their favorite items. These fashion-forward, young city dwellers come to Zara enthusiastically want to buy what they like. So, being able to check inventories in nearby stores when a customers size runs out is very important. The new system will let Zara do that.Material Resource Planning and Labor will also be better off with the new system. Zaras vendors have promised to follow Zaras IT system so it was not really problem. Yet, Zara shouldnt be standing on the passive side to wait until when it has to switch to a more up-to-date system. By taking the lead, Zara gains more flexibility and comfort to utilize resources it needs. The new system will also electronic jamming and install some new features that Zaras employees have being requesting for. Keeping the labor force beaming is essential since talents (people) are the key factor that makes it hard for other companies to copy and apply the same IT and business model Zara has successf ully. (AcAfee Brynjolfsson, 2008)AuditingSome main reasons that Sanchez pointed out to support his idea of not upgrading and some other factors that need to be considered are discussed below. Mr. Sanchez worries that switching to the new system will turbulent the stable usage of the current system and cause troubles. We have to admit that what he said could happen. Thats why we take close consideration of it to prevent it from happening rather than not to do it. The current system is effective, stable and rolls out easy to use for employees because it has been tested and run for more than ten years. Staff is familiar with the system, and IS department knows how to fix it when theres a problem. However, this shouldnt stop Zara from innovations. Zara can plan on installing the new system and test it with a small number of stores first and slowly transformed the rest of the company to use the new system.Zara may also face the difficulties to train employees to use the new system, or t he system doesnt work perfectly for Zara at the beginning phase, and therefore, causing systematic troubles that affect the business negatively. Yet, in general speaking, these software interfaces for businesses are easy to use. Not to mention that Zara has a strong IS department that can support its technology uses.In the process of new system development, Operation/Maintenance consists 80% of the time and cost while User Acceptance only contains 20%. That being said, maintaining the system and Auditing the system after it has been installed is crucial. Zaras IS department should pay more attention to them.Overall, there are more benefits and predictable profits than shortcomings to upgrade the outdated DOS system for Zara. Conclusion and RecommendationsTaking into considerations of all possible factors, I believe that this case analysis is in favor for Zara to consider upgrading its outdated DOS system to OS system. As a successful fast fashion clothing retailer, Zaras business i dea, which links customer demand to manufacturing, and links manufacturing to distribution, works very well and keeps Zara a flagship chain store for Inditex Group. Zaras generic strategy is to differentiate and save cost. Since Zara has a strong demand for speed in the operation process and tight links in Supply Chain Management, its requirement for IT is high. The evaluation of the solution shows us that there are more predictable advantages than disadvantages for Zara to upgrade its system. With thoughtful considerations and backup remediation plans, Mr. Bruno Sanchez shouldnt be so conservative and against the idea to upgrade the system. I am confident that upgrading the system will meet Zaras business goal to be the most innovative and profitable fast fashion retailer in the industry.ReferencesAcAfeeAndrew, BrynjolfssonErik. (June-August, 2008). Investing in the IT. Harvard Business Review. BaltzanPaige. (2010). Business Driven Information Systems (3rd Edition). New York, NY, USA McGraw-Hill Irwin. Business Week. (Arip 4th, 2006). Zara-Taking the Lead in closely Fashion. CarrNicholas G. (May 2003). IT Doesnt Matter. Harvard Business Review. Castellano RiosMariaJose. (1975). Business idea for Zara. Spain. CNN Business. (June 15th, 2001). Zara, a Spanish sucess story. McAfeeAndrew, DessainVincent, SjomanAnders. (2007). Zara IT for Fast Fashion. USA Harvard Business School. OsterwalderAlexander. (June 23rd, 2005). Business Model Alchemist. http//www.businessmodelalchemist.com/2005/06/zaras-business-model.html