Zara - a Retail Store Case Study

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Decentralized Decision Making Strategy

Another important aspect of the Zara’s business model is the decentralization of decision making. There is a transfer of decision making on the levels of hierarchy from the executive level to lower levels allowing decisions to be made quickly at each level. This speed and decision making strategy is an important factor in the rhythm of Zara’s supply chain. If we look at the volatility of the fashion industry we can see where the decentralized decision making fits Zara’s overall strategy of speed to market. It allows commercials (team of 2 designers and 2 product managers) to quickly determine the new fashion trends emerging, materials needed, limited item disbursement, and product pricing. It also allows store managers to make ordering decisions for their stores on a twice a week basis.

IT Strategy

Zara’s IT department is made up of 50 employees. The strategy is to make systems quick and simple at a minimal cost. The applications needed are written in-house and customized for their unique needs rather than purchased commercially. In the distribution centres different applications are used to manage inventory distributions, plan production, and control the distribution center automation. At retail stores, PDA’s are used to replenish inventories and to send and receive information to head office. The terminals used for sales are not connected to each other and information must be taken off each terminal and put onto a floppy disk to be transferred to headquarters. The PDA systems are not connected to the terminals and terminals are not connected to each other.

Value chain Model

Primary Activities

- Ordering- Orders are placed twice a week by store managers at each retail store using PDA’s. Information about what is available is sent via PDA handheld and segments of the store is divided between several staff to determine what needs to be reordered. Managers reviews and submits back to headquarters. This is different from their competitors as store managers make the decisions of what stock to order rather than headquarters deciding.

- Fulfillment- Distribution centers use automated applications to fill each retail stores orders. Inventory levels are minimal. Distribution centres only produce and deliver what each store has requested with the exception of random stock being sent out for test market purposes.

- Design & Manufacturing- These two primary functions are vertically integrated to produce new designs quickly as requested. Design teams respond quickly to the trends and demand changes of the fashion industry through a decentralized decision making structure. Many factories and manufactures are owned by Inditex group and can produce new designs quickly (10-14 days). Zara’s Design and Manufacturing structure adds the most value to their supply chain my allowing them to introduce approximately 11,000 new designs per year as compared to the industry average of 2000-4000 new designs per year. Pricing is also determined by the design team and price tags are placed on garments before shipping out.

- Distribution- Distribution centres manage all receiving, warehousing, and inventory control. Information systems help keep track of SKU’s. Zara does not stock their own inventory’s and do not have back rooms in stores. When items arrive they are immediately place on the floor for sale.

Secondary Activities

Secondary activities include procurement, technology development, human resource management and firm’s infrastructure. Majority of these activities are similar to other companies within the industry. We can see some differences in procurement and technology development. Procurement of fabrics is vertically integrated with majority of fabrics coming from companies owned by Zara or Inditex. Fabrics are purchase undyed to respond quickly to changing fashions. Technology development is internal within their IT department of 50 employees. By having an internal IT department and writing their own applications Zara has reduced their overhead costs.

Cost Analysis

The cost to implement the new operating system is dependent on which operating system that Zara would choose to use. With Windows and UNIX they both require a licencing fee to set up each terminal and a regular maintenance fee per terminal. Linux does not have a one-time licencing fee but may end up requiring more annually for maintenance fees depending on support required. Linux may end up being costly due to IT department’s lack of knowledge on the new software. See chart for costs.

Operating System

License Cost

Total

Maintenance Fee

Annual Cost

Windows

€ 140.00

€ 371,700.00

€ 30.00

€ 79,650.00

Unix

€ 160.00

€ 424,800.00

€ 25.00

€ 66,375.00

Linux

€ -

€ -

€ 10.00

€ 26,550.00

€ 150.00

€ 398,250.00

Looking at the start up and annual costs associated with each software the most cost effective operating system to choose would be UNIX. Start-up costs may be a little more up front but yearly annual costs would be kept down which is currently what the IT department has been trying to do, keep cost low. Other yearly maintenance cost include internet charges for each location. See chart below.

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Fixed costs associated with upgrading to a new POS System include the purchase of new hardware (5 POS terminals per store, wireless, and wireless Ethernet card), programming time, and training required for each store. Programming time will require 20,000 hours at a cost of €450 per day. Programming cost includes the process of porting the existing