Information Systems A Manager's Guide to Harnessing Technology

3-1Information Systems:A Managers Guide to Harnessing Technology3-2This work is licensed under theCreative Commons Attribution-Noncommercial-Share Alike 3.0 Unported License.To view a copy of this license,visit http:/creativecommons.org/licenses/by-nc-sa/3.0/or send a letter toCreative Commons,171 Second Street,Suite 300,San Francisco,California,94105,USA3-3Chapter 3Zara:Fast Fashion from Savvy SystemsA Zara store in Manhattan:Controlling the supply chain is key,Jennifer S.Altmanyou need to have five fingers touchingthe factory and Hve touching the customer.Translation:Control what happensto your product until the customerbuys it.CEO Amancio Ortega2-43-5Learning ObjectivesUnderstand how Zaras parent company,Inditex,leveraged a technology-enabled strategy to become the worlds largest fashion retailerContrast Zaras approach with the conventional wisdom in fashion retail-examining how the firms strategic use of information technology influences design and product offerings,manufacturing,inventory,logistics,marketing,and ultimately profitability3-6Learning ObjectivesDetail how Zaras approach counteracts specific factors that Gap has struggled with for over a decadeIdentify the environmental threats that Zara is likely to face and consider options available to the firm for addressing these threatsTable 3.1-Gap versus Inditex at a Glance3-7Why Study Zara?To understand and appreciate:The counterintuitive and successful strategy of ZaraThe technology,which has made all of this possible3-8Gap:An Icon in CrisisMicky Drexler,the iconic CEO,helped turn Gaps button-down shirts and khakis into Americas business casual uniformDrexlers team had spot-on tastes throughout the 1990sWhen sales declined in the early 2000s,Drexler tried to revitalize the brand by filling the stores with teenage apparelsThis shift sent Gaps mainstay customers to retailers that easily copied the styles that Gap had made classic3-9Gap:An Icon in CrisisGaps same-store sales declined for twenty-nine months straight,profits vanishedPaul Pressler,the new CEO shut down hundreds of stores,but it did not help due to bad bets on colors and stylesThe marketing model used by Gap to draw customers in via big-budget television promotion had collapsedIn January 2007,Pressler resigned3-10Contract Manufacturing:Lower Costs at What Cost?Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries can keep the cost of goods lowContract manufacturing:Involves outsourcing production to third-party firmsFirms that use contract manufacturers dont own the plants or directly employ the workers who produce the requested goodsFirms can lower prices and sell more product or maintain higher profit margins3-11Contract Manufacturing:Lower Costs at What Cost?The downside of contract manufacturingIn order to have the low-cost bid,contract firms:Skimp on safetyIgnore environmental concernsEmploy child laborEngage in some ghastly practices3-12Contract Manufacturing:Lower Costs at What Cost?Firms that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may:Turn off customersRepel new hiresLeave current staff feeling betrayed3-13Dont Guess,Gather DataTo make sure that the stores carry the kinds of products customers want,Zara managers ask the customersZaras store managers are armed with personal digital assistants(PDAs)that can be used to:Gather customer inputChat up with customers to gain feedback on what theyd like to see more ofIncentives for successas much as 70 percent of salaries can come from commissions3-14Dont Guess,Gather DataStaff also checks for customer preferences by looking at unsold itemsPDAs are linked to the stores point-of-sale(POS)systemPoint-of-sale(POS)system:A transaction process that captures customer purchase information,showing how garments rank by salesManagers can send updates that combine the hard data captured at the cash register with insights(soft data)on what customers would like to see3-15Dont Guess,Gather DataAll of this valuable data allows the firm to plan styles and issue rebuy orders based on feedback rather than hunches and guessworkThe goal is to improve the frequency and quality of decisions made by the design and planning teams3-16DesignZara designs follow evidence of customer demandZara design staff consists of young and fresh designers from design schoolTeams are regularly rotated to:Cross-pollinate experienceEncourage innovation3-17Manufacturing and LogisticsThe average time for a Zara concept to go from idea to appearance in store is fifteen days versus their rivals who receive new styles once or twice a seasonThe firm is able to be so responsive through:A competitor-crushing combination of vertical integration and technology-orchestrated coordination of suppliersJust-in-time manufacturingFinely tuned logistics3-18Manufacturing and LogisticsVertical integration:When a single firm owns several layers in its value chainValue chain:The set of interdependent activities that bring a product or service to marketNearly 60 percent of Zaras merchandise is produced in-house,with an eye on leveraging technology in areas that:Speed up complex tasksLower cycle timeReduce error3-19Manufacturing and LogisticsInventory optimization models ensure that each store is stocked with just what it needsZara leverages contract manufacturers to produce staple items with longer shelf lives,which account for only about one-eighth of dollar volume3-20Manufacturing and LogisticsCeiling-mounted racks and customized sorting machines patterned on equipment used by overnight parcel services and Toyota-designed logistics,whisk items from factories to staging areas for each storeClothes are ironed in advance and packed on hangers,with security and price tags affixedTrucks serve destinations that can be reached overnight,while chartered cargo flights serve farther destinations within forty-eight hoursZara is also a pioneer in going greenIntroduction of biodiesel for the firms trucking fleet3-21StoresRunning out of bestsellers at Zara delivers several benefits:Allows the firm to cultivate the exclusivity of its offeringsEncourage customers to buy right away and at full priceEncourages customers to visit oftenReduces the rate of failed product introductions 3-22Technology Systems.Just Ask PradaZaras IT expenditure is less than one-fourth the fashion industry averageZara excels by targeting technology investment at the points in its value chain where it will have the most significant impactZara makes sure that every dollar spent on tech has a payoff3-23Technology Systems.Just Ask PradaThe Prada example offers critical lessons for managers:Getting the right mix of the following five components is critical to executing a flawless information system rollout:HardwareSoftwareDataProceduresPeopleFinancial considerations should forecast the return on investment(ROI)of any effort Designers need to thoroughly test the system before deployment3-24Moving ForwardZaras value chain is difficult to copy,but it still has challenges to faceLimitations of Zaras Spain-centric,just-in-time manufacturing model:If problems occur in northern Spain,Zara has no other fall backThe firm is potentially more susceptible to financial vulnerabilities as the Euro has strengthened relative to the dollarRising transportation costs Zaras financial performance can also be impacted by broader economic conditions3-25Moving ForwardZaras value chain is difficult to copy;but it is not invulnerable,nor is future dominance guaranteedZaras management mustHave an understanding of how information systems can enable winning strategies Scan the state of the market and the state of the art in technology,looking for new opportunities and remaining aware of impending threats3-26Let numbers speak for themselvesThe chains profitability is among the highest in the industry.“the most innovative and devastating retailer in the world.”High fashion but are comparatively inexpensive(average item price is$27)Legions of fans eagerly await“Z-day,”the twice-weekly inventory delivery.Managers are motivated because as much as 70 percent of salaries can come from commissions.Postponement strategy:Roughly half of the cloth arrives undyed so the firm can respond as any midseason fashion shifts occur.http:/en.wikipedia.org/wiki/Postponement (e.g.,Acer PC CPU,Beer labeling)2-27Clothes are ironed in advance and packed on hangers,with security andprice tags affixed.Store staff regain as much as three hours in prime selling time(per day?).While running out of bestsellers might be seen as a disaster at most retailers,at Zara the practice delivers several benefits.2-28AttributesCompetitorsZaraNew Items Designed2,0004,000(H&M,Gap)30,000From concepts to products35 months(H&M),6 months(Gap),9 months(others)15 daysManufacturingNo factory(H&M)60%produced in houseBatch sizeHugh batch size“everything is the same”(Gap)Small batches“Youll never end up looking like someone else.”average markdown ratio approximately 50%15%(85%full price)#of store visit per year317Marketing/Revenue ratio 3.5%0.3%Failed product introductions10%1%gross margins37.5%56.8%IT Investment of the industry averageStores 3,076 stores WW with 2,551 in US(Gap)3,900 stores across 70 countries.2-29Technologies Deployed and Information Gatheredpersonal digital assistants(PDAs)handheld computing devicesPDAs are also linked to the stores point-of-sale(POS)systemLooking for evidence in the piles of unsold items that customers tried on but didnt buy.Zara designs follow evidence of customer demand.Computer-controlled machine cutting tools“The success of the model lies in being able to adapt what youre offering in the shortest time possible to what clients want.For Inditex,time is the principal factor to take into account,more so than the costs of production.”2-30Close the communication loop:Customer Store Manager/staff market specialists/designer Production staff Buyer Subcontractor Warehouse managers/distributorSeparate design,sales,and procurement and production planningstaffs are dedicated to each clothing line(Men,women,and children).Zaras cadre of 200 designers sits right in the midst of the production processEnd-to-end control of supply chain.Reduce the supply chain cycle time:Speed and responsivenessSupply chain flexibility:Most garments come with five to six colors and five to seven sizes,Zaras system has to deal with something in the realm of 300,000 new stock-keeping units(SKUs),on average,every year.2-312-32Bullwhip Effect in Supply ChainMain information flowPhysical flowDemand-Driven Supply ChainSCMERPCRMSCMIncreasing Variability of Orders up the Supply ChainThe Bullwhip Effect in Supply Chains,Hau L.Lee,V.Padmanabhan and Seungjin Whang,Sloan Management Review,April 15,1997Bullwhip effect-the tendency of supply chains(and all open-loop information systems)to amplify small disturbances.http:/en.wikipedia.org/wiki/Zara_(clothing)http:/