Description
This is a ppt about zara's business model and its strategy.
OVERVIEW
Zara Philosophy
The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by. — José María Castellano Ríos, Inditex CEO
Speed & Decision Making
• Zara needs to respond quickly to demands of their young & fashion conscious customers • Fashion misses are very common as new styles can appear very suddenly • Store managers have more authority than other stores such as deciding the garment to be put on sale • ‘Commercials’ decide which garments to be produced & sold • Have great deal of autonomy as higher management doesn’t second guess their decisions
OVERVIEW
Speed & Decision Making
Marketing, merchandising & advertising
• Very low spending on marketing while heavy spending on stores No ‘classics’ clothes but clothes with very short lifespan forcing customers to buy it on the spot, visit stores often
OVERVIEW
Marketing & Growth
•
Growth Opportunities
• • • Currently 550 ZARA stores part of Inditex chain Huge growth opportunities in Italy & western European market Hence there is need for new production & distribution network
Ordering & fulfillment
• • Manual inventory management based upon direct observation & store manager judgment Use of PDA’s, Infrared, dial-up modem for order management Process is complicated & divided in various steps such as breaking order into segments and beaming these segments to concerned person who then filled up their part
OVERVIEW
Manufacturing
•
Design & manufacturing
• Maximum time from conception to distribution centre is three weeks Vertically integrated supply chain ensured constant introduction of new items with short lead times Based upon commercial’s guess which need not be accurate
•
•
Information systems at La Coruna, factories, stores & DC’s
• • Several information systems are used to prepare orders, distribute them over internets & collect them Factories had simple applications which provided information about order & due dates Distribution center had largest automation with complete tracking of SKU’s Stores used PDA’s which communicate to La Coruna via modems PDA’s were upgraded constantly while POS terminals remained same for over decade! POS used DOS as operating system & its installation & maintenance was very simple No real time feedback from stores to Zara’s headquarters Transmission required copying into floppy disc & then sending it using internet which happened at the end of the day No dialogue between PDA & POS inside store or between two stores
OVERVIEW
Information Systems
•
•
• •
• •
•
Conventional Business Model Reliant on outsourcing production. Supply chain Role of store manager Marketing Deals with customers , employees Ads primarily for publicizing the assortment
Zara’s Business Model Highly responsive vertically integrated supply chain Decision taking powers with respect to stocking Ads only for yearly sales & announce new store inaugurations.(0.3% of revenue)
Design teams
Design conceptualized by Small elite team common for all segments.
Generally apparel firms produced CLASSIC clothes. Average new launches per year:20004000 Comparatively high due to outsourcing. Industry average is 6 months. It is done. 2% of revenue as IT applications are outsourced to vendors
Dedicated teams for different segments. Ex: Women-Night Wear, Kids-Sports wear etc.
Short life span but increased launches of new style clothing. Average new launches per year:11000
Product life span
Time to market
As Zara is vertically integrated lead times as well as time for new product launches are less(2-4 weeks) Not done due to flexible factories. 0.5% of revenue as in-house applications were developed
Sales Forecast IT Spending
“The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by”
DESIGN & PRODUCTION TEAM
Factories – Dying & cutting clothes
Commercials Store Product Managers CommercialsDedicated to Department in stores 3 WEEKS
Small Local Shops Sewing
DISTRIBUTION CENTRE
2 DAYS STORES
Current Status
• Zara currently uses POS system based upon DOS which is very easy to use & working fine for them This system does all the basic operations of billing but doesn’t provide any customer insights, real-time data or any advanced sales projections As Zara is getting bigger & bigger its operation are becoming more complex Hardware vendor may modify peripherals for POS so that they may not run on ancient OS such as DOS
•
•
CURRENT STATUS
•
Dilemna
• • • • Shall they let go of DOS which is working great for them & migrate to modern OS such as Windows, Linux? If they are not migrating to new OS then should they stock up on current POS terminals to protect them from sudden loss of support from vendor? If they migrate to new OS, can they use this opportunity to build new capabilities in POS? If they are building new POS, then can they extend its capabilities so that it can have network across the stores & within the company?
Why DOS based POS works for Zara!
• • • • DOS based POS is in alignment with Zara's business philosophy Majority of business concentrated in Europe specially Spain Zara prefers speed based decentralised decision making Highly responsive vertically integrated supply chain reduces need for long range sales forecast More dependant on market feedback from ‘commercials’ than from customer data insights Believed in ‘manufacturing on fly’ rather than long range sales forecast Zara doesn’t require theoretical inventory to be 100% accurate Low level of inventory in current scale of operation: Zara stores maintained low inventory levels thus reducing need for smart inventory management Current scope of operations makes ordering & fulfillment possible using DOS based POS
IT
DOS based POS
•
•
• • •
Easy installation & ease of operation
•
•
•
IT
Installation
•
•
• • •
Use of DOS based POS is very user friendly, stable & easy to maintain Layman like store employee can switch on system & set up entire POS architecture Complete software installation does the trick in the event of serious software malfunction No need for separate maintenance crew for POS as employees can do it by themselves Ease of customization on POS: Zara operated in various geographies & currencies which necessitates need of customization It is very easy to customise & write their own softwares on DOS based POS Majority of complex operations such as sewing, dying were outsourced by Zara Hence factories required simple applications rather than complicated applications due to its current scope of business
Zara approach to IT policy
• Comparatively low spending on IT (0.5% of revenue) as compared to industry average (2% of revenue) • No separate IT department, all decisions related to IT applications taken directly by top management • No cost benefit analysis or formal justification for IT efforts • Preference over customised IT applications due to unique nature of business • Recruitment of talent locally rather than from all over the world • Thus basic principles of It policy of Zara is ‘keep it simple, keep it cost effective’ • DOS base POS achieved all these principles
IT
IT Policy
Why do we need a new system
IT
Need for New System
• • • • •
Zara is the only customer using DOS Hardware vendor might upgrade their machines which are not DOS- compatible Vendor not ready to sign a contract Centralized data to help expand in different countries Following table shows the expansion of Zara in Asian continent which would require the new system
GEOGRAPIC DISTRIBUTION OF ZARA STORES
NO. OF STORES
UK 4% PORTUGAL 8%
TOTAL - 531
450
419
400
350 300 250 200 150 100 50 0 MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE 30 7 75
OTHERS 12% SPAIN 48%
GREECE 6% GERMANY 5%
FRANCE 17%
• • •
Majority of stores present in Europe Highest concentration in Spain followed by France Ample room for growth exists within Zara’s current markets
Increase in number of stores implies increase in Data-Base size & need for real time data-base
Store -1
PDA: 1
IT System Layout
Current IT Layout
• • No communication between stores Unidirectional communication with Modem
PDA : 2
PDA: 3
PDA- 1
Common Network
PDA-3
PDA-2
Store -2 Store -1
PDA: 1
Modem
DC
Factory
PDA : 2
PDA: 3
• •
PDA- 1
Communication between stores possible Bi-directional communication with Modem
PDA-2
PDA-3
New IT Layout
Store -2
Trade off – New System
2.5
IT Revenue (%)
IT Employee (%) of total
3 2.5 2
2 1.5 1 0.5
1.5 1 0.5 0 Inditex North American Retailers 0 Inditex North American Retailers
Efficiency
•Better inventory management •Inter-connected stores •Real time customer insights •Trend analysis
Total investment (8.3 € mn)
•Cost of replacing existing DOS systems •One time cost (License, installation, hardware) •Annual connectivity charges •Human resource for IT
Order Fulfillment Process
Current Order Fulfillment Process
Store 1 Offer received in digital format from La Coruna Store 2 Store manager (Infrared) Segment 1 (Men) Segment 2 (Women) Segment 3 (Kids) Combined Order
Store 3
Order is generated & given to La Coruna
New Order Fulfillment Process
Store 1 Offer received in digital format from La Coruna Store manager Order is generated & given to La Coruna
Store 2
Store 3
Financials in millions of Euros
Year Net Operating Revenues Cost of Goods Sold Gross Margin Operating Expenses Annual operating cost Operating Profits Non-Operating Expenses POS up gradation cost Pre-Tax Income Income Tax 2003 estimated 4,848 2,368.3 2,480.0 1,480.6 0.127 999.4 288.1 8.2 703.0 213.2 2002 3,974.0 1,954.9 2,019.1 1,179.8 839.3 224.3 615.0 172.5
Total cost of up gradation
Particulars Operating System cost (windows) Hardware cost Connectivity cost Installation charges Programming cost Total cost Break up of costs Onetime costs Recurring cost Cost (in Euros) 4,51,350 28,83,330 1,27,440 42,48,000 6,00,000 83,10,120 81,82,680 1,27,440
Minority Interest
Net Income Net Margin
5.8
483.9 9.98%
4.4
438.1 11.02%
• Recurring cost includes annual connectivity charges • Rest of the costs are one time cost only
• CAGR of 22% calculated using past data of 1996-2002 • Rest of the costs such as COGS, operating costs are calculated based upon past data • Migration to windows based POS will cause net margin decreases to 9.98% but well above average net margin of 8.29% • Cost of up gradation can be funded through cash & cash equivalent of 525 million Euros
Roadmap & Implementation
Requirements
• Gathering and analyzing the requirements of the new system on the upgraded OS • Proof of Concept for feasibility • Selecting a migration method
Design & Implementation
• Identifying the resources and availability • Prototyping, Designing & Implementing • Testing the new system
Migration
• A pilot run of the system for a country having less customers as compared to other countries • Existing system running in parallel to the new system • Migration of data from old system to the new system after the successful pilot run
doc_728852726.pptx
This is a ppt about zara's business model and its strategy.
OVERVIEW
Zara Philosophy
The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by. — José María Castellano Ríos, Inditex CEO
Speed & Decision Making
• Zara needs to respond quickly to demands of their young & fashion conscious customers • Fashion misses are very common as new styles can appear very suddenly • Store managers have more authority than other stores such as deciding the garment to be put on sale • ‘Commercials’ decide which garments to be produced & sold • Have great deal of autonomy as higher management doesn’t second guess their decisions
OVERVIEW
Speed & Decision Making
Marketing, merchandising & advertising
• Very low spending on marketing while heavy spending on stores No ‘classics’ clothes but clothes with very short lifespan forcing customers to buy it on the spot, visit stores often
OVERVIEW
Marketing & Growth
•
Growth Opportunities
• • • Currently 550 ZARA stores part of Inditex chain Huge growth opportunities in Italy & western European market Hence there is need for new production & distribution network
Ordering & fulfillment
• • Manual inventory management based upon direct observation & store manager judgment Use of PDA’s, Infrared, dial-up modem for order management Process is complicated & divided in various steps such as breaking order into segments and beaming these segments to concerned person who then filled up their part
OVERVIEW
Manufacturing
•
Design & manufacturing
• Maximum time from conception to distribution centre is three weeks Vertically integrated supply chain ensured constant introduction of new items with short lead times Based upon commercial’s guess which need not be accurate
•
•
Information systems at La Coruna, factories, stores & DC’s
• • Several information systems are used to prepare orders, distribute them over internets & collect them Factories had simple applications which provided information about order & due dates Distribution center had largest automation with complete tracking of SKU’s Stores used PDA’s which communicate to La Coruna via modems PDA’s were upgraded constantly while POS terminals remained same for over decade! POS used DOS as operating system & its installation & maintenance was very simple No real time feedback from stores to Zara’s headquarters Transmission required copying into floppy disc & then sending it using internet which happened at the end of the day No dialogue between PDA & POS inside store or between two stores
OVERVIEW
Information Systems
•
•
• •
• •
•
Conventional Business Model Reliant on outsourcing production. Supply chain Role of store manager Marketing Deals with customers , employees Ads primarily for publicizing the assortment
Zara’s Business Model Highly responsive vertically integrated supply chain Decision taking powers with respect to stocking Ads only for yearly sales & announce new store inaugurations.(0.3% of revenue)
Design teams
Design conceptualized by Small elite team common for all segments.
Generally apparel firms produced CLASSIC clothes. Average new launches per year:20004000 Comparatively high due to outsourcing. Industry average is 6 months. It is done. 2% of revenue as IT applications are outsourced to vendors
Dedicated teams for different segments. Ex: Women-Night Wear, Kids-Sports wear etc.
Short life span but increased launches of new style clothing. Average new launches per year:11000
Product life span
Time to market
As Zara is vertically integrated lead times as well as time for new product launches are less(2-4 weeks) Not done due to flexible factories. 0.5% of revenue as in-house applications were developed
Sales Forecast IT Spending
“The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by”
DESIGN & PRODUCTION TEAM
Factories – Dying & cutting clothes
Commercials Store Product Managers CommercialsDedicated to Department in stores 3 WEEKS
Small Local Shops Sewing
DISTRIBUTION CENTRE
2 DAYS STORES
Current Status
• Zara currently uses POS system based upon DOS which is very easy to use & working fine for them This system does all the basic operations of billing but doesn’t provide any customer insights, real-time data or any advanced sales projections As Zara is getting bigger & bigger its operation are becoming more complex Hardware vendor may modify peripherals for POS so that they may not run on ancient OS such as DOS
•
•
CURRENT STATUS
•
Dilemna
• • • • Shall they let go of DOS which is working great for them & migrate to modern OS such as Windows, Linux? If they are not migrating to new OS then should they stock up on current POS terminals to protect them from sudden loss of support from vendor? If they migrate to new OS, can they use this opportunity to build new capabilities in POS? If they are building new POS, then can they extend its capabilities so that it can have network across the stores & within the company?
Why DOS based POS works for Zara!
• • • • DOS based POS is in alignment with Zara's business philosophy Majority of business concentrated in Europe specially Spain Zara prefers speed based decentralised decision making Highly responsive vertically integrated supply chain reduces need for long range sales forecast More dependant on market feedback from ‘commercials’ than from customer data insights Believed in ‘manufacturing on fly’ rather than long range sales forecast Zara doesn’t require theoretical inventory to be 100% accurate Low level of inventory in current scale of operation: Zara stores maintained low inventory levels thus reducing need for smart inventory management Current scope of operations makes ordering & fulfillment possible using DOS based POS
IT
DOS based POS
•
•
• • •
Easy installation & ease of operation
•
•
•
IT
Installation
•
•
• • •
Use of DOS based POS is very user friendly, stable & easy to maintain Layman like store employee can switch on system & set up entire POS architecture Complete software installation does the trick in the event of serious software malfunction No need for separate maintenance crew for POS as employees can do it by themselves Ease of customization on POS: Zara operated in various geographies & currencies which necessitates need of customization It is very easy to customise & write their own softwares on DOS based POS Majority of complex operations such as sewing, dying were outsourced by Zara Hence factories required simple applications rather than complicated applications due to its current scope of business
Zara approach to IT policy
• Comparatively low spending on IT (0.5% of revenue) as compared to industry average (2% of revenue) • No separate IT department, all decisions related to IT applications taken directly by top management • No cost benefit analysis or formal justification for IT efforts • Preference over customised IT applications due to unique nature of business • Recruitment of talent locally rather than from all over the world • Thus basic principles of It policy of Zara is ‘keep it simple, keep it cost effective’ • DOS base POS achieved all these principles
IT
IT Policy
Why do we need a new system
IT
Need for New System
• • • • •
Zara is the only customer using DOS Hardware vendor might upgrade their machines which are not DOS- compatible Vendor not ready to sign a contract Centralized data to help expand in different countries Following table shows the expansion of Zara in Asian continent which would require the new system
GEOGRAPIC DISTRIBUTION OF ZARA STORES
NO. OF STORES
UK 4% PORTUGAL 8%
TOTAL - 531
450
419
400
350 300 250 200 150 100 50 0 MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE 30 7 75
OTHERS 12% SPAIN 48%
GREECE 6% GERMANY 5%
FRANCE 17%
• • •
Majority of stores present in Europe Highest concentration in Spain followed by France Ample room for growth exists within Zara’s current markets
Increase in number of stores implies increase in Data-Base size & need for real time data-base
Store -1
PDA: 1
IT System Layout
Current IT Layout
• • No communication between stores Unidirectional communication with Modem
PDA : 2
PDA: 3
PDA- 1
Common Network
PDA-3
PDA-2
Store -2 Store -1
PDA: 1
Modem
DC
Factory
PDA : 2
PDA: 3
• •
PDA- 1
Communication between stores possible Bi-directional communication with Modem
PDA-2
PDA-3
New IT Layout
Store -2
Trade off – New System
2.5
IT Revenue (%)
IT Employee (%) of total
3 2.5 2
2 1.5 1 0.5
1.5 1 0.5 0 Inditex North American Retailers 0 Inditex North American Retailers
Efficiency
•Better inventory management •Inter-connected stores •Real time customer insights •Trend analysis
Total investment (8.3 € mn)
•Cost of replacing existing DOS systems •One time cost (License, installation, hardware) •Annual connectivity charges •Human resource for IT
Order Fulfillment Process
Current Order Fulfillment Process
Store 1 Offer received in digital format from La Coruna Store 2 Store manager (Infrared) Segment 1 (Men) Segment 2 (Women) Segment 3 (Kids) Combined Order
Store 3
Order is generated & given to La Coruna
New Order Fulfillment Process
Store 1 Offer received in digital format from La Coruna Store manager Order is generated & given to La Coruna
Store 2
Store 3
Financials in millions of Euros
Year Net Operating Revenues Cost of Goods Sold Gross Margin Operating Expenses Annual operating cost Operating Profits Non-Operating Expenses POS up gradation cost Pre-Tax Income Income Tax 2003 estimated 4,848 2,368.3 2,480.0 1,480.6 0.127 999.4 288.1 8.2 703.0 213.2 2002 3,974.0 1,954.9 2,019.1 1,179.8 839.3 224.3 615.0 172.5
Total cost of up gradation
Particulars Operating System cost (windows) Hardware cost Connectivity cost Installation charges Programming cost Total cost Break up of costs Onetime costs Recurring cost Cost (in Euros) 4,51,350 28,83,330 1,27,440 42,48,000 6,00,000 83,10,120 81,82,680 1,27,440
Minority Interest
Net Income Net Margin
5.8
483.9 9.98%
4.4
438.1 11.02%
• Recurring cost includes annual connectivity charges • Rest of the costs are one time cost only
• CAGR of 22% calculated using past data of 1996-2002 • Rest of the costs such as COGS, operating costs are calculated based upon past data • Migration to windows based POS will cause net margin decreases to 9.98% but well above average net margin of 8.29% • Cost of up gradation can be funded through cash & cash equivalent of 525 million Euros
Roadmap & Implementation
Requirements
• Gathering and analyzing the requirements of the new system on the upgraded OS • Proof of Concept for feasibility • Selecting a migration method
Design & Implementation
• Identifying the resources and availability • Prototyping, Designing & Implementing • Testing the new system
Migration
• A pilot run of the system for a country having less customers as compared to other countries • Existing system running in parallel to the new system • Migration of data from old system to the new system after the successful pilot run
doc_728852726.pptx