The project is a study on how Vertical Integration as a supply chain strategy has worked for Zara in emerging as a fast fashion system. It also focuses on analyzing the competitive advantages and the challenges of implementing Vertical Integration for Zara.
2. WHAT IS VERTICAL INTEGRATION?
The process in which several steps in
the production and/or distribution of a
product or service are controlled by a
single company, in order to increase
that company’s power in the market
place
3. TYPES OF VERTICAL INTEGRATION
Example:
A firm that manufactures a product through an assembly process
Forward- expansion of activities downstream i.e.
company acquires its input supplier
Backward- expansion of activities upstream i.e.
company acquires companies in its distribution chain
5. APPAREL PRODUCTION INDUSTRY
Three general market segments:
High quality products for mass market
Compete on price—hold largest market share
High-end market
Compete on brand equity—have biggest profit margin
Affordable fashion clothes—ZARA’s market segment
Compete on speed—customers constantly purchase new clothes to follow trends
8 seasons to a fashion year
To compete in this market, apparel producers must seamlessly follow new
fashion trends of every new season.
6. ABOUT ZARA
Spanish Clothing and Accessories retailer
Based in Arteixo, Galicia, and founded in 1975 by
Amancio Ortega and Rasalia Mera
One brand of the Inditex group, Zara’s profit
makes up of 75% of the Inditex
Over 2000 Zara stores located across 88 countries
Practices of fast fashion – trends move from
runway to stores quickly
7. ZARA’S BUSINESS MODEL & STRATEGY
“Super-responsive” buyer driven supply chain
Customer is the main driving force behind the Zara brand.
Quick design to distribution process
Maximum time from conception to distribution center in 3 weeks
Zero Advertising
Very low spending on marketing while high spending on stores
Vertically Integrated
“The original business
idea was very simple.
Link customer demand
to manufacturing, and
link manufacturing to
distribution. That is the
idea we still live by. ”
Jose Maria
Castellano Rios,
Inditex CEO
8. ZARA’S COMPETITORS
Gap H&M Uniqlo Zara
Founded US (1969) Sweden (1947) Japan (1984) Spain (1975)
Product Smart casual
Fashionable
apparel
Casual wear and
essentials
Fashionable
apparel
Price level High Lower than Inditex Lower than Zara -
Countries 41 44 12 88
Production
Internalized
production, 90%
from outside of US
Outsourced all
production
Outsourced most
of the production
In-house
production
Strategies 3 store chains
Engaged in
extensive
advertising and
employed fewer
designers
Focus on
developing long
lasting and high-
quality clothing,
high production
Vertical
Integration
Sales 2014
(Billions US
Dollars) 16.14 18.45 13.33 22.04
9. ZARA’S SUPPLY CHAIN
Design & Manufacture
Immediate reaction to trends
Just-in-time production
Significant amount of in-house production = rapid product turnover, low
lead time
Production to proximity= Scarce supply
Ordering & Inventory
Manual inventory management based upon direct observation & store
manager judgement
Factories reserve 85 percent of their capacity for in-season adjustments
Retail
Top store location, Meticulous store design
Unique experience at every store
Different apparel for sale every time a customer visits.
10. APPAREL INDUSTRY STANDARD VS ZARA
Design 6 months
Quick popular and novel designs; more concerned
w/ quick production of saleable items than
originality
Manufacture
3 months,
usually
outsourced to
other countries
Fashionable (i.e. time-sensitive) items produced
locally: 12 to 15 days
Basics outsourced to cheaper producers
Distribution
2-3 weeks by
sea to regional
centers and on
to franchisees
Delivered by truck and air Europe in 24-hours
to Company-owned stores USA in 24-48 hours
tagged w/ in-country pricing: Asia in 48-72 hours
Industry
Standard
ZARA
11. SWOT ANALYSIS
Strength
• Fully vertically integrated (Full control)
• Tight communication loop( operates to meet
demand)
• Fast delivery
• Global outreach
Weakness
• Brand image closely tagged to competitors
• Target segments is not extremely consumer-
loyal
• No advertising
• Low quality & Limitation on Services
Threat
• Fierce competition
• Possible imitation of goods
• Economic downturn
Opportunity
• Online market and E-retail
• International expansion especially in
emerging market
12. COMPETITIVE ADVANTAGES OF VI FOR ZARA
1. Owning shops
gives it insights into
what its customers
really want
2. Flexible in the variety,
amount, and frequency
of the new styles they
produce
3. Helps make its
manufacturing
operations more
nimble
13. COMPETITIVE ADVANTAGES OF VI FOR ZARA
5. Centralized
control, avoid
misunderstanding
or conflicts
4. Create fast
fashion system
6. Manageable time
scheduling, focused
on one time schedule
14. CHALLENGES IN ZARA’S VI SYSTEM
1. Design
How to coordinate the local customers’ preferences
2. Manufacturer
Quality and perception issues
3. Logistics
Local transportation costs
4. Retail
Customer retention
15. KEY TAKEAWAYS FROM ZARA RETAILING
Implications:
• Innovation comes from
dialogue between new
technology and
strategy
• Position of store
Supply chain risk:
• Staying with the speed
• Too Speedy?
• Cross-market boundaries
17. REFERENCES
(2004) Andrew Mcafee, Vincent Dessain, Anders Sjoman “Zara: IT for fast fashion” Harvard Business
School
(2005) "How Zara fashions its supply chain: Home is where the heart is", Strategic Direction, Vol. 21 Iss:
10, pp.28 – 3 http://www.emeraldinsight.com/doi/abs/10.1108/02580540510626709
Scozzese, G., PhD. (2013). From the supply chain management to the demand chain management in
fast fashion: Zara's winning model. International Journal of Management Sciences and Business
Research, 2(5), 43-48. http://search.proquest.com/docview/1459583852?accountid=2909
Carugati, A.; Liao, R.; Smith, P., "Speed-to-fashion: Managing global supply chain in
Zara," Management of Innovation and Technology, 2008. ICMIT 2008. 4th IEEE International Conference
on , vol., no., pp.1494,1499, 21-24 Sept.
2008 http://ieeexplore.ieee.org.proxy.libraries.uc.edu/stamp/stamp.jsp?tp=&arnumber=4654593&isnu
mber=4654323
Qinghua Zhang, "Analysis on the Successful Case of Efficient Supply Chain in ZARA," Wireless
Communications, Networking and Mobile Computing, 2008. WiCOM '08. 4th International Conference
on , vol., no., pp.1,4, 12-14 Oct.
2008 http://ieeexplore.ieee.org.proxy.libraries.uc.edu/stamp/stamp.jsp?tp=&arnumber=4679487&isnu
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