Fit-for-purpose IT breeds profits for clothing retailer

Case study: Effective business alignment is the Holy Grail for many IT directors. With profits up by over 20%, one retailer is showing how to pull it off in practice

The forecast-beating financial results from Inditex last month suggest that it is not the type of technology a business has but how it is used that contributes to commercial success.

As the world's second largest clothing retailer and owner of UK high street fashion chains Zara, Bershka and Massimo Dutti, the Spain-headquartered firm reported a 22% rise in nine-month net profits at the end of last year, beating analysts' forecasts.

This news pushed its share price up as the company renewed its commitment to push ahead with store openings into 2007, expanding its 3,018-store empire across 64 countries by a further 450 stores.

Inditex uses a centralised, simplified IT infrastructure to drive a fast-to-market supply chain which matches a demand-driven business model.

In fact, the much-touted retail and manufacturing buzz around product lifecycle management systems promises the same streamlined approach that the retailer has built into its business model from the beginning.

The company floated in 2001, and since then it has tripled its store numbers and doubled the number of countries it operates in, putting it second in the world only to Gap in clothing sales. To sustain this growth, the company refreshed its IT infrastructure in 2003.

Andrew McAfee, associate professor in the technology and operations management unit at Harvard Business School, observed Inditex's technology transition in 2003. At the time, his case study revealed an out-of-date operating system for store terminals and no full-time network in place across stores.

But McAfee also told Computer Weekly that, faced with the prospect of upgrading key IT infrastructure, he had never seen a company whose IT strategy was so well aligned with the business model and yet managed to maintain such control of IT spending.

"It has IT in place to support the business processes and how it wants to run the company. But then it stops. It does not just continue to throw technology at the problem," he said.

Since the overhaul, a refreshed and streamlined store IT model has enabled repeatable, consistent processes in support of expanding into new territories and market sectors, including launching its first UK flagship homewares store, Zara Home, on Regent Street last year.

Zara's systems handle, on average, 300,000 new stock-keeping units each year. But its centralised design and production centre has removed the need for expensive communication networks and distribution infrastructure, allowing goods to be shipped directly to its stores.

Inditex brings more than 10,000 new items to market every year, dwarfing the likes of nearest rival Hennes & Mauritz (H&M), with half the output. Production batches are deliberately kept small to control supply and create demand.

Here it is not technology but the centralised organisational infrastructure that facilitates the speed and the quality of the design process.

From its main distribution centre in La Coruña in north-west Spain, Inditex shipped 400 million items to its stores last year. The company has now added to this with a further large distribution centre that opened in Castilla-León in October.

It is this tightly controlled local logistics network that enables the fast turnaround of the highly diverse stock within its stores. It can take Zara just 15 days to turn something seen on a catwalk into an item in one of it stores - a timeframe that competitors struggle to match.

And a fast production schedule is where Inditex's use of technology comes into its own. The central creative function relies on computer-aided design technology to refine prototypes. But the designers can also send specifications directly to cutting machines and other equipment in the production process.

And while some of the manufacturing is outsourced to third parties, pieces are tracked by barcode through the garment assembly production and shipping process right through to the store.

Roy Illsey, senior research analyst at Butler Group, said standard supply chain IT components are now commonly found in fashion retailers' operations. "However, integrated production and design systems can help shorten time to market," he said.

"The key technologies here are advanced workflow and collaboration tools. The product lifecycle needs to be an integral part of the technology infrastructure to achieve just-in-time production techniques. Often this part of the process was paper-based and was not linked."

But the centralised supply chain structures feeding the likes of Zara do not suit every retailer. "For business continuity reasons, retailers often like to have a tiered distribution model in place so they can re-route stock quickly. But then they have trouble at the last 100 yards to the store," said Illsey.

In-store IT also has a large part to play in the smooth running of Inditex's operations. Point of sale systems link only when needed to central operations, and PDAs give managers the ability to update inventory.

McAfee said that although Zara uses the latest mobile and transactional technology, the careful avoidance of overcomplicating its use is key to the store format success.

Unlike the trend seen among UK retailers toward IP-based networks, broadband and wireless radio frequency and radio frequency identification technologies, McAfee said Zara's PDAs were not networked to anything.

"In connectivity terms, they are islands. The only time they connect to the network is when the manager sticks the PDA in a cradle to update central systems," he said.

"Before, the job the PDA does relied on fax and paper processes, which did not scale and were not subtle enough. Inditex realised it had to address this somehow and was actually one of the first Apple Newton PDA customers in the 1990s."

And McAfee said the point of sale system is also limited to transactional stock-related functionality, but does just enough.

Inditex opened 326 stores in the last financial period, and Mike Shearwood, UK managing director of Inditex's flagship chain Zara, told a conference in November that growth will continue unabated, with a target to open 5,000 stores across the group in the next two years.

With a technology approach that so demonstrably works, it looks well placed to achieve that goal.

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