Zara and IT-enabled Innovation

MI703- Computer Information Systems

The Defending Champ

Who is the largest pure play clothing retailer in the world? Problems at the Gap

Previous CEO (Mickey Drexler, fired in 2003, went to turn around JCrew) Most recent CEO (fired in 2006)

Maybe its not the CEOs fault

Looking to sell the company

Gaps Chief Competitive Assets

Brand
Thoughts and feelings associated with a product (best US brands?) How does Gap build brand?

Coverage/ scale
Size of operation gives buying power They have lots of retail channels to touch customers.

Location, Location, Location

Where does Gap make clothes?

Offshore, in Asia

Why?
Cheaper labor

The Problem?
Most firms design a 'collection' for an entire season. Place a huge order for stocking at the start of the season.

To everything there is a season.

What do you suppose are their lead-times from design to manufacture to store: days, weeks, or months? How many new items Gap & H&M produce in a season? How do they decide what to produce? What challenges does this raise for clothing retailers?
If you get it wrong Hire and monitor the fashionistas. 2,000-4,000 Months H&M is #2, it's 3-5 months from creation to delivery.

The Challenger
Inditex Group = Zara The Most Dangerous Retailer in the World" Products may seem different than Gap

Trendier, more glamorous. Same market segment - mass market low end consumer fashions. Not mutually exclusive.

Praise for Zara

Fashions more Banana Republic prices more Old Navy.

Goldman analyst as Armani at moderate prices. Founder, Amancio Ortega, is Spain's richest man & the world's richest fashion executive.

Anyone here ever shop at Zara?

What do you think?

Success in face of competitors

Since 2000, Index has doubled stores to 2,240 (through 04 end) with sales of $76 billion. In contrast to Gaps woes, Inditex stock price more than tripled between '96 and '00.

Fast Fashion!

La Coruna warehouse is 5 million square feet = 90 football fields.

Cloth is ironed and products are packed on hangers so they don't need ironing when they arrive at stores
Price tags are affixed Unpack them & they're ready to be sold

Nine times the size of Amazon's warehouse These facilities move about 2.5 million items a week. Connected to 14 Zara factories through tunnels with ceiling-mounted rails.

Howd they do it?

Have you ever heard the old saying, In retail, ________ equals death?
Inventory.

Why's this particularly painful in fashion?

Inventory is perishable Fashion world is driven by customer demand.

If you guess wrong?

Mark down your inventory and take the loss

A radical thought

Who knows best what you should have in your stores?

Customers

If your bets are more accurate, what would this mean for inventory?
Fewer mark downs & write offs

How might we get a better handle on what customers want?

Ask them

Gap places big bets on fashion trends, Zara does not.

How does Zara do this?

Point of Sale Systems (POS)

Fancy term for cash-register. Linked to HQ to provide data Tracks how items in store are sellingwhat they have that people want.

Personal Digital Assistant (PDA)

Handheld computer for manager. Inputs items people come looking for, what customers want that they dont have.

Competency & Complimentarity

Sounds sophisticated. Does this cost a lot of money?

No, they spend 5-10 times less than rivals on technology. Theres a lot of return-on-investment (ROI) in Zara IT. No.

Are these fancy technologies?

Why does Zara succeed with IT?

They use it in a smart way (IT Competency) Its linked with core strategies (IT complimentarity)

The Process

What does Zara do with this Data?

Real-time data from PDAs and POS are whisked to 300+ designers who crank out more than 12,000 fresh items each year. Use it to decide on the fabric, cut, and price points

Just-in-time (JIT) manufacturing

Scheduling materials to arrive exactly when they are needed in the production process.
Keeps inventory to a minimum. For Zara, adds flexibility and speed.

The ace behind this is one of the world's most responsive supply chains (e.g. Dell, Wal-Mart).
Some use supply chains for efficiency, Zara uses it for innovation.

Do they have a Versace working for Zara?

No stars - mostly newcomers whose designs must take advantage of cloth & materials Zara can provide.

Why not?

Zara does not predict, respond so quickly dont have to

In-house or Outsource?

Does Zara outsource production? Why Not? Vertical Integration

Production is the critical success factor for Zara Fast Fashion. Zara produces 60% of its merchandise in-house. Zara makes 40% of its own fabric and purchases most of its dyes from its own subsidiary. Fabric is cut & dyed by robots in 23 highly automated Spanish factories. 50% of fabric arrives undyed so the firm can react to mid-season color changes. H&M has 900 suppliers and no factories.

What about competitors?

The Value Chain (M. Porter)

Infrastructure: general mgmt, planning, finance, IS HRM: recruiting, hiring, training, and development Tech. Development: R&D Procurement Inbound Operations Outbound Marketing logistics logistics & Sales

Service

Supply Chain

Fresh Fashion

At Zara, most of the products you see in stores didn't exist three weeks ago, not even as sketches. What about the Madonna concert example? How often does the average Zara store accept delivery of new products?
Twice-a-week! It's like groceries! Items rarely remain on shelves for more than a week. You essentially walk into a new store each time you visit.

What advantage does this give Zara?

Exclusivity! No single model is on the market for more than four weeks.

All this translates into speed.

Turn-around from idea to shelves is 15 days.

H&M takes 3-5 months from creation to delivery VF Corp (Lee, Wrangler) takes 9 months J . Jill takes up to a year Average = six months to design + three months to manufacture. Zara is 18 times faster than competitors!

Advertising Costs

What does Zara spend to advertise?

0.3% of sales

Whats the industry average?

3-4% of sales

For those keeping score, the average in the industry is 10 to 12 times more! Why no advertising?

Their business model does it for them.

Z-days

If your store looks entirely new twice-a-week, how do customers react to this?
They visit far more frequently

How does this impact marketing costs?

You don't need any. Zara customers visit 17 times a year (compared to 4 on average in London) Highest sales per square foot (everywhere).

Zara does almost no advertising.

Customers are rabidly loyal Line up for 'Z' days when new shipments come in.

But it costs more

Gap follows cheap labor costs, Zara manufactures where?

In Europe.

Who's got the higher manufacturing costs?

Zara. The firm spends 15-20% more on manufacturing (less of a gap than you'd expect).

How can Zara manage to survive with higher labor costs?

Zara produces lots of products in small lots Gap produces a smaller # of product in bigger lots

Deal or No Deal

How does this influence Zaras profitability?

No slack inventory. What it makes it sells. It has low prices but almost never has an additional sale, they rarely marks down items.

They take fewer risks.

Write-offs at Zara are a single-digit percentage. The industry average is 17-20%.

Zara says: "Being so quick allows us to reduce to a minimum the risk of making a mistake - and we do make mistakes - with our collections."

Gaps mistakes

Spring line '02 trumpeted as a return to basics, was a bust. Discounted within a month. And they did it again! You know what the industry said of round 2? Here are some quotes:
"The colors for women's wear are drab and for men, what's with the racks and racks of track pants?" "The women's' printed shirts are wrong and the horriblelooking men's graphic tees are really wrong

Heavy markdowns have sliced Gap margins 40% in two years.

Why doesn't Gap copy Zara?

They can't they'd have to unwind their model & fund new everything. Inimitability - Making things is easy, supply chaining is hard. Couldnt if they wanted to
They have no credit Their debt is junk

Double-edged sword

What vulnerabilities do you see in Zaras model?

Where are almost all of its products manufactured? Europe specifically Spain.

Financially vulnerable.

The Euro its a strong currency. Its been cleaning the dollars clock since its introduction. Downside is that the cost differential with Asia becomes even more pronounced.

Geographical vulnerabilities?

What dangers can arise from being centrally located in Spain?

If theres a natural disaster (think New Orleans), terror attack, strike your whole supply chain is shot. Pottery Barn Story.

Geographic Location hurting global expansion.

Hard to be fast when have to travel around the world.

Brainstorming?

Where to from here?

What business issues does this bring up? Which of these concepts are most important to your company? What other companies use IT to innovate? Who are the leaders? What are other ways that IT can be used to support innovation?