Zara

Zara is facing a decision to replace their legacy information technology system with a current enterprise resource system.  The conversion will alter the organizations long term and successful sales process.  The fact that further complicates the decision is Zara’s current electronic information system is working well and has done so for many years.  However, as technology progresses, their legacy system, which is DOS based is no longer supported by Microsoft.  In addition the PDA’s used in retail stores to transmit sales orders use a hardware device that is continuously being upgraded and may soon be completely unavailable.  Finally, the current legacy system lacks a centralized network which prevents the various business departments to communicate electronically.

Zara’s current information technology system has worked well with the business model to quickly and accurately respond to the shifting demands of customers which is evidenced by the fact that Inditex, the parent firm of Zara, was able to triple company earning from 1996 to 2000 and recently posted a net income of $502 million dollars.  This rapid growth and impressive net income serves as a valid argument against altering the company’s current information technology system and sales process.  Nonetheless, as time progresses Zara’s data collection and transmission process is growing old leaving the firm vulnerable to competitors who can replicate Zara’s business model and leverage technology to create a competitive advantage over Zara.  Therefore it is prudent that Zara examines their current information technology infrastructure and determine if there is tangible value in upgrading their system.

At La Cruna several information system are used to support Zara’s operations.  Internally developed systems are used to prepare the inventory offers, distribute the offer via the internet to stores around the world, receive orders and aggregate the orders.  A separate system compared the aggregate order to available inventories and highlighted situations of supply and demand imbalance.  A third system tracked theoretical inventory levels which are calculated by subtracted store sales from inventory shipped.  Sales data is transmitted from each store at the end of each business day via a modem connected to the stores POS terminal.  The factories use a simple application to plan production omitting sophisticated programs that could be used to optimize production schedules.  Distribution centers relied on a network of conveyors to sort the merchandize for shipment.  Finally all retail stores used PDA’s and POS systems.  PDA’s were used primarily for ordering, tracking garment returns and transmitting data from corporate headquarters.  POS systems operated on DOS.  Neither the POS nor PDA systems were always connected to headquarters or other stores which from a technology standpoint meant each store was operating on its own technology island until the end of each work day.

The decision criteria to upgrade to an enterprise resource system include the following.  If Zara upgrades their information technology system how will it affect the current sales process?  How long will take to perform the upgrade?  Will the solution be user friendly and support the current business process?  How much will the upgrade cost and will the firm experience a positive ROI on the investment?  If the firm doesn’t upgrade how much longer can they effectively operate using the current information system?

The first course of action that should be considered is no action.  Keeping the current legacy system has both advantages and disadvantages.  A few advantages of keeping the current system include global familiarity with the system, ease of use and historical success.  A few disadvantages of keeping the current system include the lack of networking capacity, no tangible inventory tracking program, the fact that the hardware being used will not be available forever and the threat of competitors mirroring Zara’s sales strategy and using technology to create a competitive advantage and steal market share from the firm.

The second alternative is to scrap the legacy system and implement an enterprise resource system capable of supporting all of Zara’s organizational processes.  The enterprise resource system should have full networking capabilities.  Every computer Zara uses should be connected to the network and continuously communicate with one another.  Beginning with the retail stores POS devices should be upgraded and be capable of logging and transmitting in real time all sales and inventory data to corporate headquarters.  PDA’s will be eliminated as inventory will be scanned upon receipt at the retail store, logged into a database and tracked by the POS devise.  In addition, POS devices will be used to generate new orders.  Automated systems can be developed to determine which items are selling well and which items are not.  The same system would be able to determine inventory imbalances and assist in determining which goods can be reallocated to stores where they are selling.  Factories will also be connected to Zara’s ordering network and once orders are confirmed factories will be provided with all the data they need to schedule production.  Advanced production programs can be developed to determine the most optimum production schedule.  Networking all of these systems will enable Zara to further enhance its ability to quickly and accurately service the ever changing demands of its customers.

Weighing the options against the decision criteria I recommend Zara upgrade their legacy information technology system to an enterprise resource system.  The implementation should be global.  My recommendation is support by the following reasons as they relate to my decision criteria.

If Zara upgrades their information technology system how will it affect the current sales process?  Zara’s current sales process and goal of satisfying the ever changing demands of their clients will be enhanced with the use of a networked enterprise resource system.  Automated network programs will enable the firm to monitor sales and changing trends in real time.  Order decisions can be made using supply and demand data and merchandise can be shifted to location with the highest demand.

How long will take to perform the upgrade?  We estimate a full scale, globally implemented upgrade will take 20,000 worker hours and one year.  A dedicated team of 55 workers will be assigned to the project.

Will the solution be user friendly and support the current business process?  The redesigned system will be unfamiliar at first and will require the firm to provide training and support.  After ample training the new system will be as user friendly as the legacy system.

How much will the upgrade cost and will the firm experience a positive ROI on the investment?  The anticipated cost of the upgrade is shown below:

·         Operating System for POS terminals – 550 locations x 5 per location x $170 = $467,500.00

·         Hardware – 550 location x $5,230.00 = $2,876,500.00

·         Connectivity – 550 locations x $240 = $132,000.00

·         Overall Programming – 20,000 hours x $56.25 = $1,125,000.00

·         Retail Installation & Training – 550 locations x 4 days x $2,000 = $4,400,000.00

·         Total Cost - $13,208,500.00

·         Current Net Income - $502,000,000.00

·         Required increase in sales to cover cost of upgrade = ($502,000,000.00 + $13,208,500.00) / $502,000,000.00 = 2.631% increase in net income to cover the cost of the upgrade

If the firm doesn’t upgrade how much longer can they effectively operate using the current information system?  If Zara elects to stay with the legacy system they’re exposing themselves to liabilities that the hardware they use will no longer be produced.  In addition they’re already using POS systems which run on DOS and are not supported by Microsoft.  Staying with the current legacy system will become a future issue that has catastrophic implications.