Zara case

In order to effectively answer the proposed questions we have decided as a group to focus our answers on the following aspects: inventory, technology and finance. These subcategories will encompass the scope of the questions. We believe that the new POS system should be implemented in order to avoid any future predicaments that Zara may face by the continued use of the old technology. After careful analysis of the case study we believe the new system will streamline inventory processes. Given the calculations, with limited data provided, we concluded that Zara is financially capable of making the transition to the new technology.

 

Inventory

We believe the POS system should be upgraded due to the fact that inventory plays such a huge role in how Zara positions itself in the marketplace. Fads and fashions have such a major influence in the apparel industry that it is important to closely link retailing and manufacturing, and constantly monitor the process between the two activities. Instead of overproducing, Zara produces as it is required this severely reduces wastage and requiring the garments to be sold at a reduced price. Zara premises do not even have a stockroom for excess inventory instead the stores only receive exactly what they need, only when they need it.

Zara does not produce “classic clothes” and instead works off the principle that its clothing will not have a long shelf life either in store or in the customers’ wardrobe. This once again highlights the importance of inventory control within Zara. Zara aims to manufacture the correct amount of garments as opposed to excess amounts, and has an efficient design and manufacturing system in place where they only produce and deliver exactly what the store require and only when they require it. This highlights how useful it would be for stores to be able to check each other’s inventory using the POS. This way Zara could request more of a particular garment off another store where it is not selling as well, instead of ordering more to be manufactured for their store, while leaving another store with excess amounts of that garment.  Upgrading the system to enable such a network amongst the different stores would save both time and money for Zara.

Based on the minimal information provided in the case study, we can make the assumption that costs can be reduced with the aid of the new POS system. Stock take would be completed automatically by the new POS system and therefore we can make the assumption that each employee on the closing shift can reduce their working hours as they are no longer required to manually complete the stock take at the end of the night, thus reducing operational costs across all 550 Zara stores.

Saving from employees per store	No. employees per store	3
	Saved hour per employee per day	1
	€/hour/employee	10
	Sub-Total	30
Saving from manager per store	No. manager per store	1
	Saved hour per employee per day	1
	€/hour/employee	15
	Sub-Total	15
Cost savings per day per store		45
Cost savings per year per store		16,425
Number of stores		550
Total		9,033,750

Technology

Taking the technological aspect into consideration further convinced us to decide to upgrade the current POS system to the later operation system (OS). As every system will, sooner or later, become obsolete and be replaced by a newer, more powerful version. The question here for us is not about whether the current POS system should be replaced, but when we should upgrade it. To answer this question we need to contrast the advantages and disadvantages of both current and to be POS systems:

	Current POS system	To-be POS system
Advantages	Stability	Forward compatibility Likely to be more secure Useful systems with necessary functions
Disadvantages	Lack of compatibility High risk of becoming a target for attackers Lack necessary functions	High risk of less stable system

The three disadvantages of the old system which Salgado also pointed out are compelling enough for Zara to implement a new system.

Firstly, the old system relies on DOS which poses a question of compatibility in future. The hardware vendor for POS terminals stated that Zara was their only remaining customer using DOS. Although Zara is one of their customers, the vendor did assure Zara that they will not make drastic changes and seize production. However that is not one hundred percent guaranteed and not in a written contract; to the best of our best knowledge. In typical business situations when the vendor feels that the revenue from selling old POS system is not sufficient, they seize production.

 Sanchez proposed a solution to deal with compatibility problem by purchasing POS systems in advance so when the vendor stops supplying old POS systems, they have POS systems available to implement in their new stores. This solution has three disadvantages: First, it only postpones the upgrading the process and does not solve the problem. In the end, an upgrade is inevitable. Second, it wastes a lot of resources: money, repository and time. Instead of Zara buying “a bunch of current terminals” and storing them for future use, as Sanchez proposed, the capital should be invested in implementing the new, more efficient system. The cost of storing these outdated POS systems contradicts the business model of Zara – avoid storing their assets (as mentioned above Zara does not have a stock room in their stores). Furthermore, it is unclear about the number of terminals they should buy to assure that the new stores will be sufficiently equipped, because the decisions to open new store depend on a complex set of factors. But most importantly, this solution costs Zara a lot of time. Instead of starting the preparation and implementation of the new system (that Zara is aware they will one day have to implement) Zara is in essence waiting for a problem to occur; and then it will react and implement a new system under pressure and in a rush.

The second disadvantage of the old system which Salgado implied is that it is prone to security issues. Although these security issues have not occurred yet, there is no guarantee that they will not happen. In fact, the possibility is high. Since Microsoft stopped supporting DOS for years, so no more patches for security threats will be released. Attackers can exploit the un-patched threats to hack the system. Furthermore, the way the old system operates is also insecure. The fact that employees manually copied sales data onto floppy disk and then carried these disks to the one modem-equipped terminal to transmit the data poses a question of data confidentiality and integrity. The employees may steal, erase or alter the data. The extent of implication of IT breaches cannot be predicted, and often not only involve financial cost but also cost restore the company’s reputation. Porting the system to more secure Windows, Linux or UNIX and then providing wifi to all stores for non-manual wireless transmission of data is a way to protect Zara’s data.

And finally, the old system does not support some critical functions. As discussed previously, tasks related to inventory control are highly important in supply chain management. In technological aspect, once the decision to upgrade the system is made, it is easy to decide to include inventory and networking functions in the to-be system. Since Windows, Linux and UNIX support graphical user interface (GUI) and network capability, it will not cost a fortune to build a user-friendly application which support networking. Moreover, the operating systems often go with powerful framework, as a result, adding more inventory-related functions is not a big problem.  For this reason we have decided to upgrade in all aspects.

Finance

Using the information that the company’s net earnings tripled between 1996 and 2000, from €72.7m to €259.2m we are assuming that the pattern in these figures will remain constant and therefore estimate the following figures:

2004	Estimated net income	876
2003	Estimated net income	657
2002	Net income	438
	Revenues	3,974
	Cost of goods sold	1,955
2001	Net income	341
	Revenues	3,250
	Cost of goods sold	1,563

We suggest that Zara starts implementing the new POS system gradually to allow the project’s total estimated implementation cost of €9.8m. Starting in 2003 Zara should begin rolling out the technology over two years to spread out the cost of this project. We recommend that the stores who receive the new technology first are the biggest and busiest stores; where daily turnover is the greatest and inventory control is a major hindrance.

Software costs	€1,388,750
Hardware costs	€2,876,500
Programming costs	€1,125,000
Installation/training costs	€4,400,000
Total costs	€9,790,250

Comments:

This is a generally well-presented paper and you have used a clear structure to organize your ideas. However, I would have liked to have seen some kind of conclusion to summarize your responses to the four questions, especially since you broke out your analysis into slightly different categories. There are some small errors in the text (please note you mean ‘cease’ not ‘seize’ production of the hardware) but these do not seriously affect the readability of your text. Your display of financial data is easy to read.

There is some good analysis in parts of this paper, which shows you have understood the situation Zara is facing. In particular, you draw some useful insights about the cost of current inventory management processes (although you should note some of your potential savings numbers are highly speculative). You also make some useful points about the drawbacks of their plan to stockpile the old systems. You made a good attempt at some financial analysis, however, your analysis is overall an underestimate of costs to Zara based on the evidence in the case.

However, there are some areas that could be improved. In particular, I encourage you to try to be more critical of assumptions you make in your next paper. For example, you argue extensively that security of the old system is a serious problem. However, if you are considering security risks, you should consider that a networked system with wifi could potentially be just as much at risk of intrusion and security breaches, if not more so. I would have liked to have seen more thought also about how significant you think Zara’s inventory problems are, and whether there could be any disadvantages to changing the way Zara’s highly decentralized inventory management works.