This is “Don’t Guess, Gather Data”, section 3.2 from the book Getting the Most Out of Information Systems: A Manager's Guide (v. 1.1). For details on it (including licensing), click here.
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After studying this section you should be able to do the following:
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 buy? 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 outside an office setting. Examples include devices from Palm, Apple’s iPhone, and devices running the Windows Pocket PC operating system.—handheld computing devices meant largely for mobile use outside 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 success—as much as 70 percent of salaries can come from commissions.K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008.
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 buy. Are there any preferences in cloth, color, or styles offered among the products in stock?D. Sull and S. Turconi, “Fast Fashion Lessons,” Business Strategy Review, Summer 2008.
PDAs are also linked to the store’s point-of-sale (POS) systemTransaction 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.—a transaction process that captures customer purchase information—showing how garments rank by sales. In less than an hour, managers can send updates that combine the hard data captured at the cash register with insights on what customers would like to see.C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008. All this valuable data allows the firm to plan styles and issue rebuy orders 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.
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 thousand 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.M. Pfeifer, “Fast and Furious,” Latin Trade, September 2007; and “The Future of Fast Fashion,” Economist, June 18, 2005. 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, 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.
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 performance.“The Future of Fast Fashion,” Economist, June 18, 2005. 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.J. Tagliabue, “A Rival to Gap That Operates Like Dell,” New York Times, May 30, 2003. To put that in perspective, Zara is twelve times faster than Gap despite offering roughly ten times more unique products!M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002. 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.L. Sullivan, “Designed to Cut Time,” InformationWeek, February 28, 2005. At Zara, most of the products you see in stores didn’t exist three weeks earlier, not even as sketches.J. Surowiecki, “The Most Devastating Retailer in the World,” New Yorker, September 18, 2000.
The firm is able to be so responsive through a competitor-crushing combination of vertical integrationWhen a single firm owns several layers in its value chain. 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 chainThe set of activities through which a product or service is created and delivered to customers..Definition from the “father” of the value chain, Michael Porter. See M. Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3 (March 2001): 62–78, among others. While H&M has nine hundred suppliers and no factories, nearly 60 percent of Zara’s merchandise is produced in-house, with an eye on leveraging technology in those areas that speed up complex 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 shipments, ensuring that each store is stocked with just what it needs.C. Gentry, “European Fashion Stores Edge Past U.S. Counterparts,” Chain Store Age, December 2007. Outside the distribution center in La Coruña, fabric is cut and dyed by robots in twenty-three highly automated factories. Zara is so vertically 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. 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.N. Tokatli, “Global Sourcing: Insights from the Global Clothing Industry—The Case of Zara, a Fast Fashion Retailer,” Journal of Economic Geography 8, no. 1 (2008): 21–38.
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.M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002. The facilities 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, employees 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.C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008; and K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008.
Trucks serve destinations that can be reached overnight, while chartered cargo flights serve farther destinations within forty-eight hours.K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008. 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 outside of Spain. Zara is also a pioneer in going green. In fall 2007, the firm’s CEO unveiled an environmental strategy that includes the use of renewable energy systems at logisticsCoordinating and enabling the flow of goods, people, information, and other resources among locations. centers including the introduction of biodiesel for the firm’s trucking fleet.
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.”K. Capell, “Fashion Conquistador,” BusinessWeek, September 4, 2006. Upon visiting a Zara, the CEO of the National Retail Federation marveled, “It’s like you walk into a new store every two weeks.”M. Helft, “Fashion Fast Forward,” Business 2.0, May 2002.
Second, limited runs encourage customers to buy 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 buy it, you can forget about coming back for it because it will be gone.”K. Capell, “Fashion Conquistador,” BusinessWeek, September 4, 2006. A study by consulting firm Bain & Company estimated that the industry average markdown ratio is approximately 50 percent, while Zara books some 85 percent of its products at full price.D. Sull and S. Turconi, “Fast Fashion Lessons,” Business Strategy Review, Summer 2008; and K. Capell, “Fashion Conquistador,” BusinessWeek, September 4, 2006.
The constant parade of new, limited-run items also encourages customers to visit often. The average Zara customer visits the store seventeen times per year, compared with only three annual visits made to competitors.N. Kumar and S. Linguri, “Fashion Sense,” Business Strategy Review, Summer 2006. Even more impressive—Zara puts up these numbers with almost no advertising. 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 spending but sales dropped.P. Bhatnagar, “How Do You Ad(dress) the Gap?” Fortune, October 11, 2004. Fashion retailers spend an average of 3.5 percent of revenue promoting their products, while ad spending at Inditex is just 0.3 percent.“Zara, A Spanish Success Story,” CNN.com, June 15, 2001, http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara.
Finally, limited production runs allow the firm to, as Zara’s CEO once put it, “reduce to a minimum the risk of making a mistake, and we do make mistakes with our collections.”C. Vitzthum, “Zara’s Success Lies in Low-Cost Lines and a Rapid Turnover of Collections,” Wall Street Journal, May 18, 2001. Failed product introductions are reported to be just 1 percent, compared with the industry average of 10 percent.N. Kumar and S. Linguri, “Fashion Sense,” Business Strategy Review, Summer 2006. So even though Zara has higher manufacturing costs than rivals, Inditex gross margins are 56.8 percent compared to 37.5 percent at Gap.C. Rohwedder, “Zara Grows as Retail Rivals Struggle,” Wall Street Journal, March 26, 2009. For labor cost comparison, K. Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek, October 9, 2008, reports that workers in Spain earn an average of $1,650/month versus $206/month in China’s Guangdong Province.
While stores provide valuable front-line 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 locations 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.C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.
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 orders are forwarded to managers at each location.C. Rohwedder and K. Johnson, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” Wall Street Journal, February 20, 2008.
Here’s another interesting thing about Zara. Given the sophistication and level of technology integration within 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 employees or total spending as a percentage of sales, Zara’s IT expenditure is less than one-fourth the fashion industry average.”D. Sull and S. Turconi, “Fast Fashion Lessons,” Business Strategy Review, Summer 2008. 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 with radio frequency identification (RFID) tagsSmall 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. (small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to). Walk into 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 sporting 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.
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 database 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.G. Lindsay, “Prada’s High-Tech Misstep,” Business 2.0, March 1, 2004.
The Prada example offers critical lessons for managers. While it’s easy to get seduced by technology, an 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. is actually made up of more than hardware and software. An IS also includes data used or created by the system, as well as the procedures and the people who interact with the system.A. Sanchenko, “Foundations of Information Systems in Business” (lecture, October 13, 2007), http://www.scribd.com/doc/396076/Foundations-of-Information-Systems-in-Business. Getting the right mix of these five components is critical to executing a flawless information system rollout. Financial considerations should forecast the return on investment (ROI)The amount earned from an expenditure.—the amount earned from an expenditure—of any such effort (i.e., what will we get for our money and how long will it take to receive payback?). And designers need to thoroughly test the system before deployment. At Prada’s Manhattan flagship store, the effort looked like tech chosen because it seemed fashionable rather than functional.