The business I have made up is a business-to-business company which imports fresh mint tea…
Bad and Bruno Sanchez Camps settled Into seats at their favorite taps bar In the Spanish city of La Corrupt. Ordered pulp Galileo (octopus Clinician style), and resumed their argument. Slogan was the head of IT for Inedited, a multinational clothing retailer and manufacturer headquartered in La Corolla (see Exhibit 1 for a map). He was S©niche’s boss, although the two men had worked together for so long that their formal reporting relationship mattered little.
It certainly did not keep Sanchez from agreeing with every point Sal goad made this evening as they discussed the point-of-sale (PC’S) terminals used by Ezra, Indies’s largest chain of stores. Sanchez was the technical lead for the POS system, so the matter was close to his heart. It’s time to upgrade them,” said Slogan. No, It’s not. ” Yes, It Is. It’s risky to let them get so far behind current technology. ” No, it’s riskier to upgrade them just to ‘stay current. ‘ -The software works fine now; we shouldn’t touch it. But it runs on DOS, which you know Microsoft doesn’t even support anymore. ” 1 And you know DOS hasn’t been purported for years now, and that hasn’t stopped us or hurt us,” Sanchez replied. “We have the right to keep using the operating system-where’s the problem? ” One problem is that the hardware or some peripheral for them, so that they’re not DOS-compatible anymore. Then where would we be? We’d be explaining why Ezra can’t open any new stores because we don’t have POS software that works with our POS hardware. Do you want that Job? “Of course not. So let’s buy a bunch of the current terminals so if that happens we’ll] have plenty of breathing room while we port the POS application to a new 05. But I don’t even think we need to do that. The terminal vendor has assured us they’re not going to make any drastic changes, and we’re a big customer. And let me remind you why we shouldn’t tamper with POS unless we absolutely have to,” Sanchez continued. “Everything about it works! Sales get recorded in stores around the world and transmitted to us here every day like clockwork.
I wrote most of the POS application, and I’m the one a store manager calls when there’s a problem they can’t fix. Do you know how many of those calls I got last week? ” I know that the application is stable, but that doesn’t Sanchez didn’t let him finish: “Noel That’s how many! Let me ask you another question-do you know how many stores we opened last week? ” No, but what’s that got to Exactly! That’s because opening a store requires no IT Involvement. You don’t have to send someone to Dublin, or Argentina, or Russia, or wherever.
The store manager Just unpacks the POS terminals, inserts a couple disks in each, plugs a modem into a phone line, and starts selling clothes. Why on Earth would you want to mess with Because I’m worried about DOS,” Slogan said. “And because I think it might be time to upgrade the POP application itself. We could add functionality, we could add networking capability, we could We could mess it up in the process. We could turn it from an application that we never have to worry about into a real headache, for us and the stores. ” But the store managers are asking for POP to include more .. Store managers are always asking for something more from us. But which do you think they’d rather have: a basic POS application that always works, or a fancy buggy one? ” Of course they’d rather have a stable application,” Slogan replied, “but we’ve been hearing more and more lately that they want to be able to look up inventory balances in their tortes, other stores Great. So instead of selling clothes they’ll be counting them all the time, trying to make sure their online inventory figures are 100% accurate. Bad idea. POS is not broken,” Sanchez finished definitively. Why are we trying to fix it? ” Instead of replying, Slogan sat back and thought. He was quite familiar with Sanchez arguments, because Slogan himself had made them many times. The two of them, in fact, often switched sides in this debate; it was how they made sure that they raised all the relevant issues and examined the whole argument, instead of getting entrenched in one point of view. This thorough approach, however, had only deepened Galoot’s confusion over what to do about POS. He wondered what overall computing infrastructure.
Ezra Business Model The original business idea was very simple. Link customer demand to Ultimately Ecclesial’g, and link Manufacturing to distribution. That is the idea we still line by. -]so© Maria Castellated Iris, Inedited CEO Ezra was founded by Amanda Ortega, who in 2003 was still its largest shareholder and the richest man in Spain. 3 Ortega had started in 1963 with clothing factories. Over time, he came to believe that retailing and manufacturing needed to be closely inked in the apparel industry, where consumer demand was notoriously hard to forecast.
So he integrated forward, opening the first Ezra store in La Corona in 1975. Two important events occurred in 1985. First, Inedited (Industrial De Disease Textile) was formed as a holding company atop Ezra, other retail chains (see Exhibit 2 for a list of them as of 2003), and a network of internally owned suppliers. Second, Jose Maria Castellated Iris Joined the company. Castellated had worked as an [T manager and shared Retag’s belief that computers were critically important in enabling the kind of business that they wanted to build. Castellated became Indies’s CEO in 1997.
Speed and Decision Making In addition to their affinity for information technology, Ortega and Castellated shared two other beliefs about the company. First, Ezra needed to be able to respond very quickly to the demands of target customers, who were young, fashion-conscious city dwellers. Their tastes in clothing changed rapidly, were very hard to predict, and were also hard to influence. Other companies in the apparel industry had shown that marketing and advertising campaigns could be effective at convincing a consumer to buy their clothes.
History had also demonstrated, however, that “fashion misses” ere common even with extensive advertising and that new styles could appear suddenly (based, for example, on what a rock star wore during a televised awards show), surge in popularity, then quickly fade. Ezra wanted to be able to produce and deliver such styles while they were still hot, rather than relying on the persuasiveness of its marketing to push clothes it had made some time ago.
Second, Ortega, Castellated, and the other senior managers wanted to take advantage of the intelligence and trust the Judgment of employees throughout the company, instead of relying on a small set of decision makers. Store managers at Ezra, for example, were given much more responsibility than those at other large clothing chains. In addition to dealing with customers, employees, contractors, and landlords, Ezra store managers decided what garments would be on sale at their stores.
They placed orders for the items they thought would sell, rather than simply accepting and displaying what headquarters decided to send them. Similarly, a group of people at La Corona called “commercials” had great discretion in deciding what clothes would be designed and produced. In sharp contrast with those of other chains, Ezra’:-3 elections were not conceptualized and designed by a small, elite team. Instead, collections were created, then extended and modified over time, by teams of within that, to a specific collection (“Basic” and “Sports,” for example, were both collections within Women).
Teams usually consisted of two designers and two product managers, who purchased material, placed production orders with the factories, and set prices. Another group of commercials, called store product managers, sat in close proximity to the product teams and served as La Corona’s main interface with Ezra stores around the world. They traveled extensively, observing what residents were wearing and talking at length with store managers to find out what kinds of clothes were selling. Even more importantly, they also tried to learn what kinds of clothes would sell if Ezra made them.
Store product managers communicated what they had seen and heard to the design teams, helping them keep abreast of fast-changing trends and demands (for a layout of the office in La Corona where design teams and store product managers sat, see Exhibit 3). Store product managers could initiate store-to- store transfers when they saw that garments selling slowly in one area were popular n another. Other employees within the commercial function also exercised a great deal of autonomy. They decided, for example, which clothes each store would be able to order.
When total orders from stores exceeded availability for an item in any period, commercials decided which stores would get clothes and which would not. Commercials’ decisions were not typically reviewed by higher-level managers. Ezra believed that such second-guessing would compromise both the company’s speed and its emphasis on decentralized decision making. Marketing, Merchandising, and Advertising Unlike its main competitors, which were other multinational clothing retailers such as HISS, Cap, and Benton, Ezra did virtually no advertising.
The company placed ads only to promote its twice- yearly sales’ and to announce the opening of a new store. As a result, Sara’s marketing expenditures averaged 0. 3% of revenue, instead of the 3%-4″/n typical for competitors. (For a financial comparison of Inedited and its three main competitors, see Exhibit 4. ) While it spent little on ads, Ezra spent relatively heavily on its stores. They were always located in a city’s prime retail district, often on the best-known street.
And while Sara’s store managers had a great deal of freedom in deciding what clothes to stock, they had no discretion about the look and feel of their stores. Store layouts were completely changed every four to five years, with artwork, window displays, and sales racks changed more frequently. A 1,500-square-meter pilot store was kept in La Corrupt, where all new store layouts were designed and tested before being rolled out around the world. After a redesign, a La Corral a-based team traveled to each Ezra store to set up the new configuration. Determined by product managers. Prices were established for the Spanish market, nominated in euros (?), and noted on the tag affixed to the garment in La Corona. Prices for other countries were set at a fixed percentage of this baseline, taking into account distribution costs and market conditions. Ezra did not try to produce “classics”-clothes that would always be in style. In fact, the company intended its clothes to have fairly short life spans, both within stores and in customers’ closets.
Three implications followed from this approach. First, experienced Ezra shoppers knew that if they saw a garment they liked they should buy it on the spot, because it might not be there on their next visit (about 75% of the researches in the average store was changed over three to four weeks). Second, shoppers also knew that they should visit the store often, since new styles showed up all the time. Finally, Ezra garments were not designed and manufactured to be highly durable; they were described as “clothes to be worn 10 times. Ezra had decided not to sell clothes over the Internet, for two main reasons. First, the company’s distribution centers (DOCS) were not configured for picking small orders and shipping them to consumers. Second, it would be complicated to handle returns of merchandise bought online. Ezra managers understood that the retail mail-order industry saw return rates as high as which they compared unfavorable with their normal 5% store returns. A Web site-wry. Ezra. Com? existed but served only as a digital display window, showing a few typical garments at any time.
Financial and Growth At the beginning of 2003, Inedited operated 1,558 stores in 45 countries, of which nearly 550 were part of the Ezra chain. The group opened on average one store per day across the world. Forty-six percent of the group’s sales were inside Spain, with France the largest international market. Ezra generated 73. % of the group’s sales. Of the three departments inside Ezra, Women accounted for 60% of sales, with the rest evenly split between Men and the fast-growing Children segment. For its fiscal-year 2002, Inedited had posted a net income of ?438 million (about $502 million US. Lars) on revenues of ?3,974 million (about $4,554 million), continuing a trend of rapid and profitable growth; the company’s earnings, for example, had more than tripled between 1996 and 2000 (Exhibit 5 provides the group’s financial information, Exhibit shows its geographic expansion, and Exhibit 7 shows growth over time). Inedited executives felt that ample room for growth existed within its current markets. Italy, for example, had very few Ezra stores, despite the fact that shoppers there were some of the most fashion conscious in Europe.
Sara’s Italian stores were extremely popular, giving Castellated confidence that the country could one day have a store density similar to that of Spain. And Indies’s western European expansion could, he felt, be largely supported with its current infrastructure. This implied that it would not be necessary to build entirely new production and distribution networks in order to support future growth. To reach its goal of quickly and accurately responding to shifting consumer demands, Ezra established three cyclical processes-ordering, fulfillment, and design and manufacturing.
Of these, ordering (of garments by the stores) was the most regular, precisely defined, and standardized around the world. Ordering Every major section of a Ezra store-Men, Women, and Children-placed an order to La Corona twice a week. The order encompassed both replenishment of existing items and initial requests for newly available garments. Stores faced “hard” deadlines for submitting these orders; if they missed the deadline, La Corona calculated a blandishment-only order for them, based on what they had sold since the previous order.
Store managers determined replenishment quantities by walking around the store and determining what had been selling by counting garments and talking to salespeople. Store personnel could not look up their inventory balances on any in- store computer, so canvassing the store was the only way to learn about stock levels. Managers learned about newly available garments by consulting a handheld computer that was linked each night, via dial-up modem, to information systems at La Corrupt. (See Exhibit 8 for a picture of a handheld.
Less than 24 hours before each order deadline a digital order form, called the offer,” was transmitted to all stores’ handheld. The offer included descriptions and pictures of the newly available items, as well as all replenishment items that were still available to that store. Each store’s offer was different; offers were developed by a team of commercials and were based on garment availability, regional sales patterns, predictions about what would sell well in each location, and other factors. (See Exhibit 9 for a portion of an offer. To facilitate ordering, the store manager usually divided the offer into segments and ‘beamed” each segment to a different handheld using infrared technology. Several people then used these handheld to fill in their segment of the offer as they walked through the store, then beamed their segments back to the store manager. After reviewing them, the manager would send the completed form, now called “the order,” back to La Corrupt. Fulfillment Fulfillment, or shipping clothes to stores to satisfy their orders, involved another group of commercials at La Corrupt.
Their Job was to match up the supply of finished clothes coming from factories into the DC with the stores’ demands for these items. They worked with two pools of information: the aggregated orders from all stores, inventory in the DC at the same point in time. Both of these were at the level of the stock<-keeping unit (SKIS), which was defined as the combination of garment plus fabric plus color plus size. When supply and demand lined up closely for a particular SW, no decisions were required; the commercial simply allowed the inventory to be divided up, by computer, among all the stores that wanted it.
If, however, demand for an SKIS was greater than supply in any ordering period, the commercial had to determine which tortes would get the available inventory and which would not. He or she did this by looking at which stores had been most successful at selling the item and which ones, if any, had been shortchanged on these decisions in the recent past. These commercials also worked with product managers to determine future production for each SKI-J. If there were more demand than supply, of course, production would be increased as quickly as possible.
When supply started to exceed demand, the commercial would decrease replenishment requests and eventually stop placing new factory orders altogether. Finally, commercials could also ship items that stores did not order. These were typically new garments for which Ezra wanted to assess demand. They would be sent to stores in targeted geographies; store managers knew to expect such deliveries periodically, and to offer the clothes for sale rather than asking where they came from.
Store managers also knew to expect that some items that they had ordered might not arrive because total demand had exceeded supply and commercials had decided to allocate available SKU elsewhere. Deliveries typically showed up at stores one or two days after each order was placed. Stores in western Europe were replenished by truck from the two Spanish Docs. Latin American stores were replenished from smaller local Docs. 5 More remote stores, such as those in northern Europe and the Middle East, were replenished by air from the Spanish Docs.
Garments did not stay long in a DC; the goal was to produce, then deliver, only what the stores needed, and only when they needed it. In fact, there was little inventory anywhere in Sara’s supply chain. Clothes flowed quickly, and without stopping, from factories to [133 to stores, where they were immediately put on the ales floor; Ezra stores had no ‘back room” where excess inventory could be kept. Each section of all Ezra stores ordered twice a week, but different sections received shipments on different days.
As a result, the DC in La Corona was active throughout the week but most active on the days when Women’s orders were shipped to stores, since the Women’s Department accounted for the greatest share of sales, orders, and SKU. Design and Manufacturing collections at the start of the fall/winter and spring/’ summer buying periods. In sharp contrast to the competition, however, Ezra also brought out new items mutinously throughout the year, including both changes to existing garments (for example, a shirt with a new collar or color) and entirely new creations.
In a typical year, Ezra introduced approximately 11,000 new items; competitors averaged Sara’s vertically integrated manufacturing operations enabled this constant introduction of new items and also ensured short lead times. Production requirements were distributed across a network of specialized facilities that quickly produced and delivered the required goods. Ezra owned a group of factories in and around La Corona to do the capital-intensive initial production steps of dyeing and outing cloth. ” Cut fabric was sewn into garments at a network of small local workshops in Galatia and northern Portugal that guaranteed quick turnaround times?
All finished garments were sent to a Ezra facility, where they were ironed, inspected, given a machine-readable tag, and sent to a DC. Using this network, Ezra could consistently move a new design from conception through production and into the DC in as little as three weeks. 3 Two days after that, the garment could be on sales racks in stores around the world. This speed enabled Ezra to respond to the fast-changing and unpredictable tastes of its target customers. As far as Inedited managers were aware, no other large apparel retailer could match this capability.
A consequence of Sara’s approach to design, fulfillment, and manufacturing was that the company did not have to rely on accurate long-range sales forecasts. Instead, commercials within design teams simply made an initial guess about how well a garment would sell, then communicated this guess to factories in the form of a first- production requirement. It was not critical that this guess be accurate. Stores’ orders told commercials how well the garment was selling and thus whether future production should be increased or decreased. And flexible factories with short lead times could adjust to such changes easily and rapidly.
Ezra did not have to predict what would be selling six months, or even one month, in the future; it could continuously sense what customers wanted to buy and respond “on the fly. ” Information Technology Approaches and Organization Sara’s approach to information technology was consistent with its preferences for speed and decentralized decision making. The company had no chief information officer and no formal processes for setting an IT budget or deciding on specific technology investments or projects. Instead, Slogan and Castellated sat on a technology steering committee and so got involved early in discussions of initiatives Exhibit 10).
As these discussions progressed, Slogan and his colleagues would determine what new systems, if any, were required and which IS department personnel should work on them. There was little or no formal Justification for IT efforts, nor were cost] benefit analyses typically conducted for a proposed effort. Slogan and his colleagues shared a preference for writing the applications they needed themselves rather than buying commercially available software. They felt hat the company’s operations were unique enough that commercial packages would not be suitable.
The fact that Ezra did business in so many countries and currencies, for example, meant that standard accounting packages would have to be heavily modified and extended. Rather than attempting this, the IS department wrote its own accounting software. Similarly, the applications that supported ordering, fulfillment, and manufacturing were largely developed internally. ” Application development and other IT activities were the responsibility of an 18 department of approximately 50 people, almost all hailing from Galatia and recruited room local universities. They were divided into three groups: Store Solutions, Logistics Support, and Administrative Systems. With very few exceptions, all IT support of Inedited stores around the world was done directly from La Corrupt. Staff retention was not seen as a problem; in the last 10 years, only one person had left the department. La Corona At La Corrupt, several information systems were used to support Sara’s operations. Internally developed applications were used to prepare the offer and distribute it over the Internet to stores around the world and also to receive orders from all of the stores and aggregate them.
Another application compared the aggregated order to available inventory for each SKIS, highlighted situations where supply and demand were imbalanced, and executed commercials’ decisions about how to allocate products when demand exceeded supply. Yet another application kept track of the “theoretical inventory” of each SKU at each store. Shipments to stores increased this inventory, and sales decreased it. At the end of each business day, each store transmitted that day’s sales for all SSL(Us back to La Corrupt, using a modem connected to one of the store’s POS terminals (see Exhibit 11 for a photo of a Ezra POS terminal).
Of course, if shipments and sales were not recorded perfectly, stores’ theoretical inventory would become inaccurate; theft, damage, and other losses would also make theoretical inventory a poor reflection of reality. The company had not historically been greatly concerned that theoretical inventory be 100% accurate for each store and SKU at all times. Theoretical inventory was used to help make allocation decisions and for little else. ” Slogan maintained that “Having and often you don’t need more accuracy. Factories Inside Sara’s factories, relatively simple applications were used to plan production. These applications did not use sophisticated mathematics to generate “optimal” plans and schedules. Instead, they presented factory managers with quantities and due dates for all production requests. Managers used this information to load their factories and put Jobs in sequence. The most sophisticated technologies inside Ezra factories were usually the large computer- controlled equipment that cut cloth into patterns. These machines calculated how to position patterns so as to minimize scrap and could cut over 100 layers of fabric at a time. Cut fabric was then sent from Ezra factories to external rockroses for sewing. Distribution Centers (DOCS) Sara’s Docs relied on a great deal of automation and computerizing. At the La Corona DC, for example, miles of automated conveyor belts facilitated the ongoing task of receiving bulk quantities of each garment from factories then recombining these garments into shipments for each store. (See Exhibit 12 for a picture of these conveyor belts. Information systems tracked where each SKU was stored as it entered the DC, then controlled the conveyor belts to pick them up and drop them off at the appropriate places. Humans helped with this work, particularly by taking armaments off the belts at the end of their Journey through the DC, then putting them on hanger racks or in cardboard boxes that would be sent to each store. Sara’s IT department wrote the applications that controlled the Doc’s automation, often in collaboration with the vendors of conveyor equipment.
Stores All Ezra stores had identical handheld-also known as personal digital assistants (Pads)-and POS systems. PADS had been introduced in 1995. At that time, many within the company felt that it was taking too long and costing too much to fax order forms back and forth to all stores around the world twice a week. Because of the number of SKU involved these forms could be well over 15 meters long, so it was time consuming to send and receive them.
Unreliable fax machines, paper shortages, and other similar problems also introduced delays and frustration into the critical ordering process. Slogan and his colleagues decided to address the situation with IT and began experimenting with handheld computers that would communicate with La Corona via modem. They first used Apple’s Newton device and became one of the largest users of this then- new technology. After the Newton was discontinued in 1998, Ezra switched to another PDA manufacturer.