Chap34.pdf

F I G U R E 3 . 1

Zara’s operations are concentrated in Spain,
but they have stores around the world like
these in Manhattan and Shanghai.

Source: Used with permission from Inditex.

C H A P T E R 3
Zara: Fast Fashion from
Savvy Systems

1. INTRODUCTION

L E A R N I N G O B J E C T I V E

1. Understand how Zara’s parent company Inditex leveraged a technology-enabled strategy to
become the world’s largest fashion retailer.

The poor, ship-building town of La Coruña in northern Spain seems an unlikely home to a tech-
charged innovator in the decidedly ungeeky fashion industry, but that’s where you’ll find “The Cube,”
the gleaming, futuristic central command of the Inditex Corporation (Industrias de Diseño Textil),
parent of game-changing clothes giant, Zara. The blend of technology-enabled strategy that Zara has
unleashed seems to break all of the rules in the fashion industry. The firm shuns advertising and rarely
runs sales. Also, in an industry where nearly every major player outsources manufacturing to low-cost
countries, Zara is highly vertically integrated, keeping huge swaths of its production process in-house.
These counterintuitive moves are part of a recipe for success that’s beating the pants off the competi-
tion, and it has turned the founder of Inditex, Amancio Ortega, into Spain’s wealthiest man and the
world’s richest fashion executive.

The firm tripled in size between 1996 and 2000, then its earnings skyrocketed from
$2.43 billion in 2001 to $18.2 billion in 2010. In August 2008, sales edged ahead of Gap,
making Inditex the world’s largest fashion retailer.[1] Table 3.1 compares the two fash-
ion retailers. While Inditex supports eight brands, Zara is unquestionably the firm’s
crown jewel and growth engine, accounting for roughly two-thirds of sales.[2]

T A B L E 3 . 1 Gap versus Inditex at a Glance

Gap Inditex

Revenue $14.7 billion $18.2 billion

Net Income $1.2 billion $2.5 billion

Number of Stores 3,246 5,044

Number of Countries 31 77

Biggest Brand Gap Zara

Number of Other Brands 4 7

Based in San Francisco, USA Arteixo (near La Coruña), Spain

First Store Opened 1969 1975

Sources: http://www.gapinc.com; http://www.inditex.com; http://www.marketwatch.com; updated from C. Rohwedder, “Zara Grows as Retail Rivals

Struggle,” Wall Street Journal, March 26, 2009.

1.1 Why Study Zara?
While competitors falter, Zara is undergoing one of the fastest global expansions the fashion world has
ever seen, opening one store per day and entering new markets worldwide—seventy-seven countries so

contract manufacturing

Outsourcing production to
third-party firms. Firms that
use contract manufacturers
don’t own the plants or
directly employ the workers
who produce the requested
goods.

far. The chain’s profitability is among the highest in the industry.[3] The fashion director for luxury
goods maker LVMH calls Zara “the most innovative and devastating retailer in the world.”[4]

Zara’s duds look like high fashion but are comparatively inexpensive (average item price is $27, al-
though prices vary by country).[5] A Goldman analyst has described the chain as “Armani at moderate
prices,” while another industry observer suggests that while fashions are more “Banana Republic,”
prices are more “Old Navy.”[6] Legions of fans eagerly await “Z-day,” the twice-weekly inventory deliv-
ery to each Zara location that brings in the latest clothing lines for women, men, and children.

In to understand and appreciate just how counterintuitive and successful Zara’s strategy is,
and how technology makes all of this possible, it’s important to first examine the conventional wisdom
in apparel retail. To do that we’ll look at former industry leader—Gap.

1.2 Gap: An Icon in Crisis
Most fashion retailers place s for a seasonal collection months before these lines make an appear-
ance in stores. While overseas contract manufacturers may require hefty lead times, trying to guess
what customers want months in advance is a tricky business. In retail in general and fashion in particu-
lar, there’s a saying: inventory equals death. Have too much unwanted product on hand and you’ll be
forced to mark down or write off items, killing profits. For years, Gap sold most of what it carried in
stores. Micky Drexler, a man with a radar-accurate sense of style and the iconic CEO who helped turn
Gap’s button-down shirts and khakis into America’s business casual uniform, led the way. Drexler’s
team had spot-on tastes throughout the 1990s, but when sales declined in the early part of the following
decade, Drexler was left guessing on ways to revitalize the brand, and he guessed wrong—disastrously
wrong. Chasing the youth market, Drexler filled Gap stores with miniskirts, low-rise jeans, and even a
much-ridiculed line of purple leather pants.[7] The throngs of teenagers he sought to attract never
showed up, and the shift in offerings sent Gap’s mainstay customers to retailers that easily copied the
styles that Gap had made classic.

The inventory hot potato Drexler was left with crushed the firm. Gap’s same-store sales declined
for twenty-nine months straight. Profits vanished. Gap founder and chairman Dan Fisher lamented, “It
took us thirty years to get to $1 billion in profits and two years to get to nothing.”[8] The firm’s debt was
downgraded to junk status. Drexler was out and for its new head the board chose Paul Pressler, a Dis-
ney executive who ran theme parks and helped rescue the firm’s once ailing retail effort.

Pressler shut down hundreds of stores, but the hemorrhaging continued largely due to bad bets on
colors and styles.[9] During one holiday season, Gap’s clothes were deemed so off target that the firm
scrapped its advertising campaign and wrote off much of the inventory. The marketing model used by
Gap to draw customers in via big-budget television promotion had collapsed. Pressler’s tenure saw
same-store sales decline in eighteen of twenty-four months.[10] A Fortune article on Pressler’s leader-
ship was titled “Fashion Victim.” BusinessWeek described his time as CEO as a “Total System Fail-
ure,”[11] and Wall Street began referring to him as DMW for Dead Man Walking. In January 2007,
Pressler resigned, with Gap hoping its third chief executive of the decade could right the ailing giant.

Contract Manufacturing: Lower Costs at What Cost?

Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries
can keep the cost of goods low. Firms can lower prices and sell more product or maintain higher profit mar-
gins—all good for the bottom line. But many firms have also experienced the ugly downside to this practice.
Global competition among contract firms has led to race-to-the-bottom cost-cutting measures. Too often, this
means that in to have the low-cost bid, contract firms skimp on safety, ignore environmental concerns,
employ child labor, and engage in other ghastly practices.

The apparel industry in particular has been plagued by accusations of employing sweatshop labor to keep
costs down. Despite the fact that Gap audits contract manufacturers and has a high standard for partner con-
duct, the firm has repeatedly been taken to task by watchdog groups, the media, and its consumers, who have
exposed unacceptable contract manufacturing conditions that Gap failed to catch. This negative exposure in-
cludes the October 2007 video showing Gap clothes made by New Delhi children as young as ten years old in
what were described as “slave labor” conditions.[12]

Gap is not alone; Nike, Wal-Mart, and many other apparel firms have been tarnished in similar incidents. Big
firms are big targets and those that fail to adequately ensure their products are made under acceptable labor
conditions risk a brand-damaging backlash that may turn off customers, repel new hires, and leave current
staff feeling betrayed. Today’s manager needs to think deeply not only about their own firm’s ethical practices,
but also those of all of their suppliers and partners.

38 INFORMATION SYSTEMS VERSION 1.3

Tech for Good: The Fair Factories Clearinghouse

The problem of sweatshop labor has plagued the clothing industry for years. Managers often feel the pressure
to seek ever-lower costs and all too often end up choosing suppliers with unacceptably poor practices. Even
well-meaning firms can find themselves stung by corner-cutting partners that hide practices from auditors or
truck products in from unmonitored off-site locations. The results can be tragic for those exploited, and can
carry lasting negative effects for the firm. The sweatshop moniker continues to dog Nike years after allegations
were uncovered and the firm moved aggressively to deal with its problems.

Nike rival Reebok (now part of Adidas) has always taken working conditions seriously. The firm even has a Vice
President of Human Rights and has made human dignity a key platform for its philanthropic efforts. Reebok in-
vested millions in developing an in-house information system to track audits of its hundreds of suppliers along
dimensions such as labor, safety, and environmental practices. The goal in part was to identify any bad apples,
so that one division, sporting goods, for example, wouldn’t use a contractor identified as unacceptable by the
sneaker line.

The data was valuable to Reebok, particularly given that the firm has hundreds of contract suppliers. But senior
management realized the system would do even more good if the whole industry could share and contribute
information. Reebok went on to donate this system and provided critical backing to help create the nonprofit
organization Fair Factories Clearinghouse. With management that included former lawyers for Amnesty Inter-
national, Fair Factories (FairFactories.org) provides systems where apparel and other industries can share audit
information on contract manufacturers. Launching the effort wasn’t as easy as sharing the technology. The U.S.
Department of Justice needed to provide a special exemption and had to be convinced the effort wouldn’t be
used by ers to collude and further squeeze prices from competitors (the system is free of pricing data).

Suppliers across industries now recognize that if they behave irresponsibly the Fair Factories system will carry a
record of their misdeeds, notifying all members to avoid the firm. As more firms use the system, its database
becomes broader and more valuable. To their credit, both Gap and Nike have joined the Fair Factories
Clearinghouse.

K E Y T A K E A W A Y S

< Zara has used technology to dominate the retail fashion industry as measured by sales, profitability, and growth. < Excess inventory in the retail apparel industry is the kiss of death. Long manufacturing lead times require executives to guess far in advance what customers will want. Guessing wrong can be disastrous, lowering margins through markdowns and write-offs. < Contract manufacturing can offer firms several advantages, including lower costs and increased profits. But firms have also struggled with the downside of cost-centric contract manufacturing when partners have engaged in sweatshop labor and environmental abuse. < Firms with products manufactured under acceptable labor conditions face multiple risks, including legal action, brand damage, reduced sales, lower employee morale, and decreased appeal among prospective employees. CHAPTER 3 ZARA: FAST FASHION FROM SAVVY SYSTEMS 39 personal digital assistants (PDAs) Handheld computing devices meant largely for mobile use outside an office setting. PDAs were initially (nonphone) handheld computing devices, but sophisticated computing capabilities have now been integrated into other mobile device classes, such as smartphones and tablets. point-of-sale (POS) systems Transaction processing systems that capture customer purchases. Cash registers and store checkout systems are examples of point-of-sale systems. These systems are critical for capturing sales data and are usually linked to inventory systems to subtract out any sold items. Q U E S T I O N S A N D E X E R C I S E S 1. Has anyone shopped at Zara? If so, be prepared to share your experiences and observations with your class. What did you like about the store? What didn’t you like? How does Zara differ from other clothing retailers in roughly the same price range? If you’ve visited Zara locations in different countries, what differences did you notice in terms of offerings, price, or other factors? 2. What is the “conventional wisdom” of the fashion industry with respect to design, manufacturing, and advertising? 3. What do you suppose are the factors that helped Gap to at one point rise to be first in sales in the fashion industry? 4. Who ran Gap in the 1990s? How did the executive perform prior to leaving Gap? Describe what happened to sales. Why? 5. Who was the Gap’s second CEO of this decade? How did sales fare under him? Why? 6. Where do Gap clothes come from? Who makes them? Why? Are there risks in this approach? 7. Describe the downside of working with a supplier exposed as having used unethical practices. How does this potentially damage a firm? How can technology play a role in helping a firm become more socially responsible with its supply sourcing? 8. Describe the Fair Factories Clearinghouse. Which firm thought of this effort? Why did they give the effort away? Think in terms of strategic resources: what happens as more firms join this effort and share their data? 2. DON’T GUESS, GATHER DATA L E A R N I N G O B J E C T I V E 1. Contrast Zara’s approach with the conventional wisdom in fashion retail, examining how the firm’s strategic use of information technology influences design and product offerings, manu- facturing, inventory, logistics, marketing, and ultimately profitability. Having the wrong items in its stores hobbled Gap for nearly a decade. But how do you make sure stores carry the kinds of things customers want to ? Try asking them. Zara’s store managers lead the intelligence-gathering effort that ultimately determines what ends up on each store’s racks. Armed with personal digital assistants (PDAs)—handheld computing devices meant largely for mobile use out- side an office setting—to gather customer input, staff regularly chat up customers to gain feedback on what they’d like to see more of. A Zara manager might casually ask, “What if this skirt were in a longer length?” “Would you like it in a different color?” “What if this V-neck blouse were available in a round neck?” Managers are motivated because they have skin in the game. The firm is keen to reward suc- cess—as much as 70 percent of salaries can come from commissions.[13] Another level of data gathering starts as soon as the doors close. Then the staff turns into a sort of investigation unit in the forensics of trendspotting, looking for evidence in the piles of unsold items that customers tried on but didn’t . Are there any preferences in cloth, color, or styles offered among the products in stock?[14] PDAs are also linked to the store’s point-of-sale (POS) system—a transaction processing sys- tem that captures customer purchase information—showing how garments rank by sales. Using these two systems, managers can quickly and regularly send updates that combine the hard data captured at the cash register with insights on what customers would like to see.[15] All this valuable data allows the firm to plan styles and issue re s based on feedback rather than hunches and guesswork. The goal is to improve the frequency and quality of decisions made by the design and planning teams. 2.1 Design Rather than create trends by pushing new lines via catwalk fashion shows, Zara designs follow evidence of customer demand. Data on what sells and what customers want to see goes directly to “The Cube” outside La Coruña, where teams of some three hundred designers crank out an astonishing thirty thou- sand items a year versus two to four thousand items offered up at big chains like H&M (the world’s third largest fashion retailer) and Gap.[16] While H&M has offered lines by star designers like Stella McCartney and Karl Lagerfeld, as well as celebrity collaborations with Madonna and Kylie Minogue, 40 INFORMATION SYSTEMS VERSION 1.3 vertical integration When a single firm owns several layers in its value chain. value chain The set of activities through which a product or service is created and delivered to customers. logistics Coordinating and enabling the flow of goods, people, information, and other resources among locations. the Zara design staff consists mostly of young, hungry Project Runway types fresh from design school. There are no prima donnas in “The Cube.” Team members must be humble enough to accept feedback from colleagues and share credit for winning ideas. Individual bonuses are tied to the success of the team, and teams are regularly rotated to cross-pollinate experience and encourage innovation. 2.2 Manufacturing and Logistics In the fickle world of fashion, even seemingly well-targeted designs could go out of favor in the months it takes to get plans to contract manufacturers, tool up production, then ship items to warehouses and eventually to retail locations. But getting locally targeted designs quickly onto store shelves is where Zara really excels. In one telling example, when Madonna played a set of concerts in Spain, teenage girls arrived to the final show sporting a Zara knockoff of the outfit she wore during her first perform- ance.[17] The 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 season. Smaller tweaks arrive even faster. If enough customers come in and ask for a round neck instead of a V neck, a new version can be in stores with in just ten days.[18] To put that in perspective, Zara is twelve times faster than Gap despite offering roughly ten times more unique products![19] At H&M, it takes three to five months to go from creation to delivery—and they’re considered one of the best. Other retailers need an average of six months to design a new collection and then another three months to manufacture it. VF Corp (Lee, Wrangler) can take nine months just to design a pair of jeans, while J. Jill needs a year to go from concept to store shelves.[20] At Zara, most of the products you see in stores didn’t exist three weeks earlier, not even as sketches.[21] The firm is able to be so responsive through a competitor-crushing combination of vertical in- tegration and technology-orchestrated coordination of suppliers, just-in-time manufacturing, and finely tuned logistics. Vertical integration is when a single firm owns several layers in its value chain.[22] While H&M has nine hundred suppliers and no factories, nearly 60 percent of Zara’s mer- chandise is produced in-house, with an eye on leveraging technology in those areas that speed up com- plex tasks, lower cycle time, and reduce error. Profits from this clothing retailer come from blending math with a data-driven fashion sense. Inventory optimization models help the firm determine how many of which items in which sizes should be delivered to each specific store during twice-weekly ship- ments, ensuring that each store is stocked with just what it needs.[23] Outside the distribution center in La Coruña, fabric is cut and dyed by robots in twenty-three highly automated factories. Zara is so ver- tically integrated, the firm makes 40 percent of its own fabric and purchases most of its dyes from its own subsidiary. Roughly half of the cloth arrives undyed so the firm can respond as any midseason fashion shifts occur. And in the face of record-high cotton prices in 2010, Zara was able to retool offer- ings away from more costly fabrics, preserving margins. By contrast, rival H&M saw profits drop 10 percent largely due to margin pressure.[24] After cutting and dying, many items are stitched together through a network of local cooperatives that have worked with Inditex so long they don’t even operate with written contracts. The firm does leverage contract manufacturers (mostly in Turkey and Asia) to produce staple items with longer shelf lives, such as t-shirts and jeans, but such goods account for only about one-eighth of dollar volume.[25] All of the items the firm sells end up in a five-million-square-foot distribution center in La Coruña, or a similar facility in Zaragoza in the northeast of Spain. The La Coruña facility is some nine times the size of Amazon’s warehouse in Fernley, Nevada, or about the size of ninety football fields.[26] The facil- ities move about two and a half million items every week, with no item staying in-house for more than seventy-two hours. Ceiling-mounted racks and customized sorting machines patterned on equipment used by overnight parcel services, and leveraging Toyota-designed logistics, whisk items from factories to staging areas for each store. Clothes are ironed in advance and packed on hangers, with security and price tags affixed. This system means that instead of wrestling with inventory during busy periods, em- ployees in Zara stores simply move items from shipping box to store racks, spending most of their time on value-added functions like helping customers find what they want. Efforts like this help store staff regain as much as three hours in prime selling time.[27] Trucks serve destinations that can be reached overnight, while chartered cargo flights serve farther destinations within forty-eight hours.[28] The firm recently tweaked its shipping models through Air France–KLM Cargo and Emirates Air so flights can coordinate outbound shipment of all Inditex brands with return legs loaded with raw materials and half-finished clothes items from locations out- side of Spain. Zara is also a pioneer in going green. In fall 2007, the firm’s CEO unveiled an environ- mental strategy that includes the use of renewable energy systems at logistics centers including the in- troduction of biodiesel for the firm’s trucking fleet. CHAPTER 3 ZARA: FAST FASHION FROM SAVVY SYSTEMS 41 radio frequency identification (RFID) tags Small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to. Think of RFID systems as a next-generation bar code. information system (IS) An integrated solution that combines five components: hardware, software, data, procedures, and the people who interact with and are impacted by the system. return on investment (ROI) The amount earned from an expenditure. 2.3 Stores Most products are manufactured for a limited production run. While running out of bestsellers might be seen as a disaster at most retailers, at Zara the practice delivers several benefits. First, limited runs allow the firm to cultivate the exclusivity of its offerings. While a Gap in Los Angeles carries nearly the same product line as one in Milwaukee, each Zara store is stocked with items tailored to the tastes of its local clientele. A Fifth Avenue shopper quips, “At Gap, everything is the same,” while a Zara shopper in Madrid says, “You’ll never end up looking like someone else.”[29] Upon visiting a Zara, the CEO of the National Retail Federation marveled, “It’s like you walk into a new store every two weeks.”[30] Second, limited runs encourage customers to right away and at full price. Savvy Zara shoppers know the newest items arrive on black plastic hangers, with store staff transferring items to wooden ones later on. Don’t bother asking when something will go on sale; if you wait three weeks the item you wanted has almost certainly been sold or moved out to make room for something new. Says one twenty-three year-old Barcelona shopper, “If you see something and don’t it, you can forget about coming back for it because it will be gone.”[31] A study by consulting firm Bain & Company estimated that the industry average markdown ratio is approximately 50 percent, while Zara books some 85 per- cent of its products at full price.[32] The constant parade of new, limited-run items also encourages customers to visit often. The aver- age Zara customer visits the store seventeen times per year, compared with only three annual visits made to competitors.[33] Even more impressive—Zara puts up these numbers with almost no advert- ising. The firm’s founder has referred to advertising as a “pointless distraction.” The assertion carries particular weight when you consider that during Gap’s collapse, the firm increased advertising spend- ing but sales dropped.[34] Fashion retailers spend an average of 3.5 percent of revenue promoting their products, while ad spending at Inditex is just 0.3 percent.[35] Finally, limited production runs allow the firm to, as Zara’s CEO once put it, “reduce to a minim- um the risk of making a mistake, and we do make mistakes with our collections.”[36] Failed product in- troductions are reported to be just 1 percent, compared with the industry average of 10 percent.[37] So even though Zara has higher manufacturing costs than rivals, Inditex gross margins are 56.8 percent compared to 37.5 percent at Gap.[38] While stores provide valuable frontline data, headquarters plays a major role in directing in-store operations. Software is used to schedule staff based on each store’s forecasted sales volume, with loca- tions staffing up at peak times such as lunch or early evening. The firm claims these more flexible schedules have shaved staff work hours by 2 percent. This constant refinement of operations throughout the firm’s value chain has helped reverse a prior trend of costs rising faster than sales.[39] Even the store displays are directed from “The Cube,” where a basement staging area known as “Fashion Street” houses a Potemkin village of bogus storefronts meant to mimic some of the chain’s most exclusive locations throughout the world. It’s here that workers test and fine-tune the chain’s award-winning window displays, merchandise layout, and even determine the in-store soundtrack. Every two weeks, new store layout marching s are forwarded to managers at each location.[40] Technology ≠ Systems. Just Ask Prada Here’s another interesting thing about Zara. Given the sophistication and level of technology integration with- in the firm’s business processes, you’d think that Inditex would far outspend rivals on tech. But as researchers Donald Sull and Stefano Turconi discovered, “Whether measured by IT workers as a percentage of total em- ployees or total spending as a percentage of sales, Zara’s IT expenditure is less than one-fourth the fashion in- dustry average.”[41] Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spent on tech has a payoff. Contrast this with high-end fashion house Prada’s efforts at its flagship Manhattan location. The firm hired the Pritzker Prize—winning hipster architect Rem Koolhaas to design a location Prada would fill with jaw-dropping technology. All items for sale in the store would sport radio frequency identification (RFID) tags (small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to). Walk in- to a glass dressing room and customers could turn the walls opaque, then into a kind of combination mirror and heads-up display. By wirelessly reading the tags on each garment, dressing rooms would recognize what was brought in and make recommendations of matching accessories as well as similar products that patrons might consider. Customers could check inventory, and staff wielding PDAs could do the same. A dressing room camera would allow clients to see their front and back view side-by-side as they tried on clothes. 42 INFORMATION SYSTEMS VERSION 1.3 It all sounded slick, but execution of the vision was disastrous. Customers didn’t understand the foot pedals that controlled the dressing room doors and displays. Reports surfaced of fashionistas disrobing in full view, thinking the walls went opaque when they didn’t. Others got stuck in dressing rooms when pedals failed to work, or doors broke, unable to withstand the demands of the high-traffic tourist location. The inventory data- base was often inaccurate, regularly reporting items as out of stock even though they weren’t. As for the PDAs, staff reported that they “don’t really use them anymore” and that “we put them away so tourists don’t play with them.” The investment in Prada’s in-store technology was also simply too high, with estimates suggesting the location took in just one-third the sales needed to justify expenses.[42] The Prada example offers critical lessons for managers. While it’s easy to get seduced by technology, an …