Executive Summary:

Inditex has created a successful business model by transforming there

companies supply chain into a well-oiled machine. Inditex has been able to
vertically integrate their operations; this has allowed them to reduce their
cycle times down to just 3 weeks. Inditexs flag ship franchise is a store
named Zara.
Zara has been faced with a difficult decision to upgrade their current
operating system. Upgrading the operating system would be a very capital
intensive project (Dos to Windows). Some members of the steering
committee are reluctant to change due to extensive costs and the If it is not
broken do not fix it philosophy.
In comparison to Industry Standards Zara is grossly underfunding their IT
department. They have got away with using cheap and simple software. With
the way Zara has been expanding there is no way they can maintain the
status quo with their current systems.
Moving forward Zara has to make a strategic decision into what direction
they want their company to go in.

Continue down the same path

Invest in the Windows Operating System
Buy all of the available DOS software

After Zara is finished with their IT expansion into Windows they will need to
implement certain procedures to ensure the operations do not go back to
previous efficiencies.
Issue Identification:
Although Zara is regarded as one of the top clothing stores around the world
and heralded for their sublime operational efficiencies, but they are still
facing some internal issues.
The primary issue Zara has to overcome is deciding what to do with their
Point of Sale systems (POS). The technology that is being utilized by Zara is
out-dated and has the possibility of losing their only POS vendor. Normally a
decision of this magnitude would be decided by the CIO. Since Zara prides
itself on having horizontal teams they have an IT steering committee that
decides what to do with their companys information technology. Without a
primary decision maker the IT department has stayed relatively dormant on
the issue.
With any large capital investment there is a certain amount of scrutiny
involved during the decision making process. The Nay Sayers of the
company argue the system is working fine. This can be illustrated by the
minuscule amount of store managers calling for help setting up their POS
systems. However, everyday Zara gets bigger the operations become more
complex. Zara relies on the POS information to turn around 3 week cycle

times. If at any time the out dated POS system causes a slowdown in
information sharing the result would be catastrophic
Environmental and Root Case Analysis:
Zara understands what its core consumers want, stylish, affordable cloths.
Zara understands how to make this possible. That is why their original
business model was simple, Link customer demand to manufacturing, and
link manufacturing to distribution. This business model is what Zara lives
and breathes every day, by incorporating this statement into all of their
capital expenditures and creating a vertically integrated supply chain. In the
pursuit of vertically integrating Zara has created a unique ultimate supply
chain. They control a vast majority of their supply chain. Controlling all
facets of the supply chain has allows Zara to forgo cost and focus their
companys resources on speed (Exhibit 1)
SWOT
Strength:
Zara controls the most reactive supply chain in the global clothing business.
This quick supply chain allows Zara to release thousands more SKUs a year
then there competitors. One of their strengths is the simplicity of their POS
system. Right now anybody who can use a floppy disk can successfully
manage Zaras POS system. Having a simple POS system also allows Zara to
spend a quarter of the industry standard on their IT department (.5%
opposed to 2% of revenue. The uniqueness of Zara has forced the IT
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department to right all of their own computer OS codes; this system has
worked seamlessly over the years.
Weaknesses:
Zara has weakness in the form of an understaffed IT department. They have
no CIO to lead their team and make the hard decisions. Zaras other
weakness in their IT department is that the OS they are using is out of date.
It is not only the OS that needs an upgrade. This is evident by the handheld
PDAs that every Zara store manager collects sales data in. Since not all
stores have wireless in the branches they have to collect all the data from
the different terminals, compile the data on a floppy disk, and send it over to
corporate.

Opportunity:
There is quite a bit of room for Zara to grow. The biggest opportunity is they
need to expand online. There is push back from members of the company
because their stores are not equipped to handles 40-50% returns. Zara has a
unique opportunity to improve the technology side of their business. If Zara
is going to continue to grow like it has been the current system will not last.
Threats:

The main threat facing Zara is their OS supplier discontinuing their service.
This is a very possible threat as Zara cannot get their vendor to sign an
agreement promising Zara they will not discontinue their OS services.
Quantitative Analysis:
Zara may be smaller by size, but there financials are very competitive. As
noted in the solvency ratio Zara is capable of meeting there short-term
financial obligations. The ROE ratio shows that Zara has been generating a
large profit with the money shareholders have invested. Essentially what the
numbers are showing us is Zara has the flexibility to cover a significant
capital investment into its IT department. This is illustrated in Exhibit 3.

Alternatives and Options:

Alternative one: Zara stays with its current OS system:
The first alternative will be to do nothing at all and continuing to use the
DOS. Some would argue if its not broken dont fit it. This would be true in a
company whose growth stayed linear and the business landscape did not
change. Currently, Zaras OS is not supported by Microsoft. Since Zaras IT
team has developed all of the programs in house they only have one supplier
to buy hardware from. Choosing one vendor to build a strategic relationship
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with is never considered a terrible idea. What makes this different is the fact
the OS vendor will not promise to keep these OS systems in stock anymore.
If this vendor were to drop Zara it would be detrimental. The change over
time for their 531 stores would take 2124 hours and $4248000 before Zara
could open another store. Another problem with not changing is Zara will not
be able to handle high volumes of returns. This is holding them back from
the very lucrative online sales. Lastly, Zara uses theoretical inventory which
is only 95% accurate. The current system is set up for eye balling inventory
levels. The PDAs also does not allow the stores to check inventory of other
locations. Improving the OS will solve all of these issues. Meanwhile, doing
nothing and staying with the current system will only animate the issues
further. The advantage of doing nothing is that Zara can maintain a total
spend of .5% of revenue on IT, freeing up funds to invest elsewhere.

Alternative two: Upgrade the OS system to Windows:

The second alternative would be upgrading to Windows, Operating System.
Although this project would have a significant impact on the bottom line for
Zara this is something that needs to be done. The total cost of this project
would be $8,310,120.00 and have a reoccurring yearly fee of $207,090.00
Not only can Zara improve the efficiencies of the store managers but it can
also put in a place a system to allow for higher sales and more growth
potential for the company. The costs associated with this upgrade are

defined in Exhibit 2. If Zara can upgrade its POS system and PDA they can
improve their operational efficiencies as illustrated in Exhibit 4. What this
new system will do is reduce the need for managers to infrared their
inventory to commercials. This streamlines the process from orders and
information going back and forth to offers orders then fulfilments. It will also
give the Stores access to each others information and instant two way
action to the modem.
Alternative Three: Buy up all of the OS from the sole supplier:
If Zara is intent on the operating system currently being used, what they
need to do is buy large quantities of their DOS from their supplier. This will
protect the company from any discontinuation from their vendor. Since the
supplier will not add stocking the DOS system indefinitely on the contract
with Zara the company needs to negotiate better terms. Zara may not get
the suppliers to hold the inventory indefinitely but what they can do is
negotiate a better deal with their supplier. This deal would include holding 45 months of inventory for Zara with the promise of a purchase. The supplier
would essentially act as a third party warehouse for Zara.
Recommendation and Implementation:
I recommend that Zara goes through with a strategy that contains pieces of
all three Alternatives. Changing over IT systems in a large company usually
gets implemented over a five year plan. This is why Zara should upgrade
their OS from DOS to Windows, but doing so very slowly. This will happen by
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changing the PDAs from Dell to a more efficient system. Like any large
infrastructure project this investment take some time to implement. That is
why Zara will need to purchase a safety stock of DOS units to protect
themselves against their supplier pulling the product.
Zara needs to identify the availability of the resources to complete the
changeover. Before any stores are changed over Zara needs to run extensive
simulation to test the new operating system. Once all of these conditions
have been satisfied Zara can move on to the next step, live test runs. Zara
cannot roll over the entire companies OS system all at once. It takes four
business days per store to upgrade the systems; with 531 stores it is not
feasible or cost effective to switch them all in such a short time span. The
first step for rolling this out would be to identify a cluster of stores that do
the least business (Middle East at 45 stores, US at 75 stores). This way Zara
can run two parallel systems in case the new OS does not satisfy the unique
needs of Zara.
After the short term goals have been completed it will be time for Zara to
move on to implementing their long term goals. This includes total system
migration. The long term goal is to have the entire DOS obsoleted and start
solely using Windows. After a successful transition from DOS to Windows in
the Middle East and the Americas Zara now has the knowledge to
successfully implement their systems upgrade on their home soil. Zara will
have to start in locations in Europe that they have less visibility in. For
instance start in the smaller cities like Germany and Ireland and gradually
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move up from there. Once the upgrades come into the areas which have
large store densities, Zaras IT department will have all of the bugs worked
out and it will make the transition seamless.
Monitor and Control:
In order to make sure the improvements that have been made to the OS are
not lost their need to be controls put in place. These controls will monitor the
IT activity and flag when things are going wrong. Ensuring the integrity of the
improvements often times gets forgotten and any benefits realized by the
improvement quickly disappear. In order to ensure the OS system is
maintaining its benefits Zara will need to implement the following controls:
1) Develop Standards and Procedures.
2) Implement Process Control

Exhibits:
Exhibit 1)
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Supply Chain Map

Exhibit 2)

Financial

Last

one year

Situation
Solvency:

year

ago

Current ratio
Return on Equity

1.13
24.90

1.02
22.90%

Return on Asset

%
14.54

13.07%

Exhibit 3)

%
Inventory
Turnover
Days
Receivables
Debt/Equity

5.31
22

5.22
21
9

71.11
%

57.05%

Exhibit 4)

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