Question 1

According to Richard Hyman, ³Vertical integration has gone out of fashion in the consumer economy. Zara is a spectacular exception to the rule´. Explain how Zara used its vertically integrated supply chain to its advantage. What are the drawbacks of having a highly vertically integrated supply chain for a fashion retailing company? Explain.


1. The global apparel market presently is a consumer-driven industry. Also, globalization and new technologies have allowed consumers to have more access to fashion and different varieties. As a result, consumers are changing, competition is fierce, and companies are evolving to meet these demands. 2. Zara is a flagship brand of the Spanish retail group Inditex which plays the role of retailer, who has taken a new approach in the industry. With their unique strategy, Zara has the competitive advantage to be sustainable. In order to maintain that advantage and growth they confront certain challenges that face traditional retailers in the apparel industry. In the present day setup of companies shying from using the vertically integrated supply chain due to cost constraints, Zara has on the other hand been able to sustain more growth and profit by retaining this system.

³The idea of vertic al integration is anathema to an increasing number of companies. Most of yesterday¶s highly integrated giants are working overtime at splitting into more manageable, more energetic units ± i.e., de-integrating. Then they are turning around and re-integrating ± not by acquisitions but via alliances with all sorts of partners of all shapes and sizes.´ ²Tom Peters, Liberation Management

3. Vertical Integration can be termed as a firm¶s ownership of vertically related activities. The greater the firm¶s ownership and control over successive stages of the value chain for its product, the greater its degree of vertical integration. The extent of vertical integration is indicated by the ratio of a firm¶s value added to its sales revenue. So in such a situation Zara should have been making losses compared to other companies but the situation was on the contrary. 4. Zara¶s success is based on its vertically integrated supply chain system that achieves a speed of response to market demand that is without precedent in the fast moving fashion clothing sector. Zara¶s cycles of design, production, and distribution are substantially faster than any of its main competitors. For most fashion retailers there is a six-month lag between completing a new design and deliveries arriving at retail stores. Zara can take a new design from drawing board to retail store in as little as three weeks. Products are designed at the Inditex headquarters in La Coruna on

For its own production. 8. They also make faster purchase decisions in the knowledge that garments move quickly and are unlikely to be restocked. 6. and 72 hours in Japan.000 garments are designed annually with about one-quarter entering production. Another aspect that makes Zara¶s business model more profitable then any other retailer is because in the complete supply chain cycle it is playing both the role of the manufacturer and the role of the retailer and hence is capable of making more . This is due to its very closely integrated supply network. Zara¶s products spend no more than two weeks in a retail store. then transferred by monorail to the La Coruna distribution cent re. to the styles worn by trendsetters on TV. 48 hours in the US. Product market specialists provide critical feedback that is used both to adjust production levels and to make design or colo ur modifications to existing items. Zara customers make more frequent visits to their local stores than is typical for other fashion retailers. Postponing dying until later in the production process allows colo urs to be changed at short notice. The close. Most fabric is supplied undyed. Finished products are ironed. continuous adjustments to designs are made in response to new information on fashion trends and customer preferences. The strength of Zara lies in having the new design product on the retail counter within 2 weeks time. 5. in popular music and in the leading-edge clubs and also to feedback received from store managers and other employees. Zara¶s compressed product cycles have induced changes in customers¶ retail buying behaviour. Orders are dispatched within eight hours of receipt and are delivered within 24 hours in Europe. According to market response.the northwest tip of Spain. labe lled (including tags with prices in local currencies). bagged in boxes or on hangers ready for retail display. which comprises Zara¶s own factories and subcontractors who undertake all sewing operations whereas the rest is outsourced to third-party manufacturers. At the beginning of each season only small numbers of each new item are produced and are placed in a few lead stores. Typically. and New York. 7. 40% of fabric requirements are supplied by Comidex ± a wholly owned subsidiary of Inditex. Another important aspect in its supply chain is that Zara owns and manages almost all its retail stores. Zara¶s vertical integration works for Zara because it fits with other aspects of its strategy: mid-market pricing. London. Zara then adjusts production. informal information networks within Zara are critical to product design. The concept of pull is utilised by following the need raised by the customers which is identified by the salesmen who in turn have been specially trained for this. Although designers begin working on new designs some nine months before each new season. Paris. This allows standardised layout and window displays and close communication and collaboration between store managers and headquarters. Zara¶s tightly coordinated system allows quick response to market demand. high-fashion orientation. Each retail store submits its orders twice a week and receives shipments twice a week. Over 40. and constantly changing product range. Nearly half of Zara¶s products are manufactured within Zara¶s local network. Designers and market specialists are encouraged to be alert to the new ranges released by the fashion houses of Milan.

Zara can ship fewer pieces. Zara though is making profits due to its operating methodology of vertical integration however some inherent limitations that are there are as enumerated below : (a) Economies of scale. the centralized logistics system might eventually be subject to diseconomies of scale as Zara continues to open stores all around the world and ships product from its single Distribution Center in Europe. as much as 12 times faster than the competition. Zara¶s strategy creates some weaknesses. in a greater variety of styles. Zara has not invested in distribution faci lities (c) Diseconomies of scale. Competitors. 9. They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. And with shorter lead times. (b) Increased costs. They have higher research and development costs. Vertical integration has made Zara successfully develop a strong merchandising strategy. This strategy has led it to create a climate of scarcity and opportunity as well as a fast-fashion system. they may not be able to supply more retail locations due to their ³centralized logistic´ model. This system may work well with the current . more often and they can more easily cancel lines that don't sell as well.profits than any of its close competitors even though associated costs of maintaining the full process is higher. However.000 stores. These higher costs are then incurred for the Inditex Corporation. cutting inventory costs and adjusti ng to fashion trends quickly. Vertical integration often leads to the inability to acquire economies of scale . It takes less than two weeks for a skirt to get from Zara's design team in Spain to a Zara store in Qatar or Paris or Tokyo. which again leads to increased costs. The company spends 15 percent more to produce its garments in Spain and Portugal than rivals spend in China mainly due to labor costs. Zara¶s speedy and recurrent introduction s of new products incur increased costs as well. are dealing with a complex global network just to make a simple shirt. avoiding inventory backlogs. it more than compensates by not advertising. As a result. Even though Zara has been successful at scaling up its distribution system. Drawbacks of having a highly integrated supply chain for a fashion retailing company. although it is aware of how to quickly supply 1. in a process that could take up to eight months from the design stage to the store. to support their global expansion. 9. which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate. Their vertical integ ration has some drawbacks or limitations. Traditional retailers do not experience higher costs in all of these areas. meanwhile. That also means that employees must be trained in order to use the new manufacturing techniques. Effective supply chain and its advantage can be seen from the following example.

The U. Zara won¶t be benefiting from short lead times and low operational cost with a single central Distribution Center model as they are branching out into other countries. the company has to bring in its supply chain and why? Answer 1. Some of the threats that Zara today faces in its expansion drive are: (a) Zara's vertically integrated model is a threat to its success in the long run. Expanding operations in different regions (America. (e) Developing vertically integrated supply chain system in different countries with high labor cost will result in high production cost Zara Management is considering investing in distribution and production in new regions they are expanding into. North America and Asia seemed to be the obvious regional opportunities. Europe etc. Economics of the various countries also point that the next major spending markets would be the East Asian as well South East Asian countries. all the apparel were shipped from Europe to the States which incurred a significant transportation cost. Question 2 In the light of Zara¶s global expansion in far-off locations like Asia and America. Zara¶s product development teams are constantly researching the market by traveling to universities and clubs around the world to track customer preferences. Additionally it is foraying into the American and Asian markets in a big way. (d) Fast and recurring introduction of new products in different countries increase costs in R&D: In the manufacturing environment. Asia. However. The American markets are presently reeling under the economic recession and would take a long time to recover and be profitable but for Zara this would still remain a huge market to tap as presently Zara has very less outlets compared to the market size. Zara today has more than 1600 outlets in 82 countries around the world with more stress and coverage in the European markets. Also throughout the season. what modifications according to you. 2.number of stores because majority of the stores are centralized in Europe. the young.S market was subject to retailing overcapacity. requires addressing different fashion trends at a . fashionable. Additionally. demanded larger sizes on average and as Zara did not have any distribution or manufacturing facility within United States. Zara¶s product development teams are responsible for attending high -fashion fairs and exhibitions to translate the latest trends of the season into their designs. Currently. Zara's designing. The model will not work once Zara scales its oper ation. and international staff helps to interpret the desire of the moment (Zara). production. distribution and retails stores are tightly coupled together and operate very closely.).

3. (c) While Zara may find it d ifficult to manage the vertically integrated model for its large scales of operation.time. 45% in Spain (Note that this is Zara's local market too) and 15-30% in other three major European markets. scaling its operation may require joint -ventures and acquiring some smaller chains also. (e) Zara's business model is based on ever changing fashion. This also allows Zara to protect itself from any regional development / disruption which is the case today as a majority of the production is done in Spain only. it is very difficult for Zara to impose its business model to the other partner. For countries like US and the other emerging markets of Asia. For example. it will be very difficult for Zara to keep up its production in Spain and subsequent distribution and sale in these countries. Also. For America which is slightly lesser fashion forward like Western Europe the requirements of the markets could be assessed by the shop managers as is being done and then sold in the market. Advertisement is becoming an important part of the business and it reflects directly to the sales. (d) It is not easy to beat the local retailers in their home market. local retailers may follow Zara's formula to success and can emerge as big threat to its success. Zara should most likely develop a second central distribution center in the America¶s to decrease logistics in order to deliver fashionable goods in a faster manner. The modifications that Zara should bring in its supply chain so as to maintain and grow as a firm during its expansion to the far off regions of America and Asia are as follows: (a) It can have multiple vertically integrated productions for each region. it would not be easy to pull a new fashion cloth or apparel from one region and put it in other region. thereby reducing the market sustainability of Zara at these new markets. given different sizes/ trends in different regions. Specially. (f) With changing time. Their second central distribution facility should be an expansion of one of their smaller distribution centers located in Argentina. where people are less fashion forward and stepped up deep in their culture. . Zara's in -store advertisement model may not work going forward in the densely populated region of Asia as the people are to a greater extent influence d by the advertising done and carried. Brazil or Mexico. (b) Also. the Local apparel market in Italy is still owned 61% by the independent stores. it may be a challenge for Zara to mark its presence and sustain in these markets. In a 50:50 joint venture. The close proximity of the distribution center to the American market will allow them to effectively interpret the particular American fashion. In this aspect it has been noticed that many of Zara's joint ventures dissolving on a couple of occasions. in countries with very cheap labour (mostly in Asia).

4. inventory missteps.(b) Today a major concern at any part of the world or in any business is the rising transportation costs due to the rise in the fuel and oil prices . get those products to market quickly. The advantages of using franchises could be expl oited as the losses if any being incurred would not be on Zara and at the same time they incur huge savings on establishment and infrastructural cost. As Zara has been looking forward for expansion to the various sectors and going for a global reach. Inorder to tide over this aspect Zara needs to maintain its monopoly in the supply chain and can go for increasing the costs as the majority of its clientele are those that purchase items off the shelf at the moment the product is manufactured. So inorder to strengthen its supply chain it should go for agreements with the various air cargo carriers for speedy delivery. (f) Zara has to change its outlook from being a sole manufacturer to retailer to start outsourcing some product items to other firms at the same time keep its core competency intact that is of having the latest fashion in stores. Zara has been having a successful supply chain model even though it is going for a vertically integrated chain which is not advisable for the garment industry. As the turnaround time for receipt at a store to display on the shelf is critical in its supply chain it should go ahead for the utilisation of special containerised packing wherein garments can be kept on the hangers itself. Herein Zara can use the help of various franchises initially to gain a foothold before going on its own in these countries till the time they have been accepted and organised. and eliminate costs related to advertising. The second factor has been that information can also su bstitute . It is technology that helps Zara identify and manufacture the clothes customers want. This would be affecting the model of twice-weekly deliveries that has been key to defining the Zara experience becomes more expensive to maintain. Extensive outsourcing has become a key feature of all fast-cycle product development throughout the various sectors. Zara needs to always have the cutting edge in Information Technolog y and should always upgrade itself with the latest in the offering. (e) Today Zara is entering into hitherto untested waters like the Asian and the South American countries. and markdowns. This has primarily been due to the underlining fact that s peed can substitute for inventory Faster reaction with the very little finished goods produced results in lesser inventory and savings due to nil or very little overstocks and further no spiralling variety production. These are generally countries which have a very potential of risk associated due to the varied tastes and likes. (d) Zara¶s winning formula can only exist through management¶s savvy understanding of how information systems can enable winning strategies. these aspects should be kept in mind so as to reduce time as well as to reduce costs. (c) Zara should also go for the containerised handling facilities which provide warehousing facilities in storage and transportation.

similarly when there are greater uncertainties concerning costs. production. Zara¶s cycles of design. This will be able to be effective in the European Markets. In this aspect and looking at the future of the growth of Zara it is suggested that Zara should continue with its vertically integrated supply chain management but at the same time should resort to outsourcing and utilisation of the multiple vertical integrated supply chain. Question 3 Most of the supply chain management efforts by organisations now -a-days are aimed at minimising costs rather than on maximising revenues. As Zara shall be positioning themselves to gain a foothold in these markets so greater the need to invest . The advantages that Zara could most possibly gain from these are : (a) The fewer the number of firms. For most fashion retailers there is a sixmonth lag between completing a new design and deliveries arriving at retail stores. and demand.inventory as has been done by Zara by pre -empting the needs of its customers and so sustaining a comprehensive edge . also transaction-specific investments increase the advantages of Vertical Integration. and distribution are substantially faster than any of its main competitors. (c) Taxes and regulations are a cost of market contracts that can be avoided by Vertical Integration. Today Zara is moving ahead and is progressing to attaining a larger global market by expanding to both the American continent as well as the Asian region. (d) In the American and the Asian Markets since the dissimilarity are more so greater the advantages of outsourcing and transportation costs as compared with the Vertical Integration. (b) The greater are information asymmetries. 2. Answer 1. and the greater the advantages. technologies. Do you think Zara should continue with these practices or should aim at reducing costs so as to maximise profits? Take a stand and justify. the greater the difficulty of writing contracts. Zara can take a new design from drawing board to retail store in as little as three weeks. the greater are the transaction costs and bigger the advantages of Vertical Integration. However Zara¶s supply chain management practises are an exception. 3. the more likely is opportunistic behavio ur and the greater the advantages of Vertical Integration. Zara¶s success is based on a business system that achieves a speed of response to market demand that is without precedent in the fast moving fashion clothing sector.

in capability development and so the greater the advantages of outsourcing over Vertical Integration. 4. and the greater the administrative disadvantages of Vertical Integration. the more risky is Vertical Integration and better advantageous will be outsourcing. Zara cannot address different requirements and challenges working from its home location only and so it would be but optimal for it to have multiple vertically integrated production for each region apart from going into outsourcing to achieve better targets and profit margins. In these aspects the greater will be the flexibility advantages of outsourcing. (e) with the need for expansion to new markets the greater will be the need for entrepreneurship and flexibility and also subsequently will be greater the advantages of high-powered incentives provided by market contracts. . Also for areas where more heavier the investment requirements and higher the independent risks at each stage.

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