c


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.

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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
the northwest tip of Spain. Over 40,000 garments are designed annually with about
one-quarter entering production.

5. The strength of Zara lies in having the new design product on the retail
counter within 2 weeks time. This is due to its very closely integrated supply network.
Nearly half of Zara¶s products are manufactured within Zara¶s local network, which
comprises Zara¶s own factories and subcontractors who undertake all sewing
operations whereas the rest is outsourced to third-party manufacturers. For its own
production, 40% of fabric requirements are supplied by Comidex ± a wholly owned
subsidiary of Inditex. Most fabric is supplied undyed. Postponing dying until later in
the production process allows colo urs to be changed at short notice. Finished
products are ironed, labe lled (including tags with prices in local currencies), bagged
in boxes or on hangers ready for retail display, then transferred by monorail to the La
Coruna distribution cent re. 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. Each retail store submits its orders twice a week and receives
shipments twice a week. Orders are dispatched within eight hours of receipt and are
delivered within 24 hours in Europe, 48 hours in the US, and 72 hours in Japan.

6. Another important aspect in its supply chain is that Zara owns and manages
almost all its retail stores. 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. At the
beginning of each season only small numbers of each new item are produced and
are placed in a few lead stores. According to market response, Zara then adjusts
production. Typically, Zara¶s products spend no more than two weeks in a retail
store. 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. The
close, informal information networks within Zara are critical to product design.
Although designers begin working on new designs some nine months before each
new season, continuous adjustments to designs are made in response to new
information on fashion trends and customer preferences. Designers and market
specialists are encouraged to be alert to the new ranges released by the fashion
houses of Milan, Paris, London, and New York; to the styles worn by trendsetters on
TV, in popular music and in the leading-edge clubs and also to feedback received
from store managers and other employees.

7. Zara¶s compressed product cycles have induced changes in customers¶ retail

buying behaviour. Zara customers make more frequent visits to their local stores
than is typical for other fashion retailers. They also make faster purchase decisions
in the knowledge that garments move quickly and are unlikely to be restocked.
Zara¶s vertical integration works for Zara because it fits with other aspects of its
strategy: mid-market pricing, high-fashion orientation, and constantly changing
product range.

8. 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
profits than any of its close competitors even though associated costs of maintaining
the full process is higher.

9. Effective supply chain and its advantage can be seen from the following
example. 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, as much as 12 times faster than the
competition. And with shorter lead times, Zara can ship fewer pieces, in a greater
variety of styles, more often and they can more easily cancel lines that don't sell as
well, avoiding inventory backlogs. Competitors, meanwhile, are dealing with a
complex global network just to make a simple shirt, in a process that could take up to
eight months from the design stage to the store. The company spends 15 percent
more to produce its garments in Spain and Portugal than rivals spend in China
mainly due to labor costs, it more than ›

   
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9. 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. 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. However,
Zara¶s strategy creates some weaknesses. Their vertical integ ration has some
drawbacks or limitations. Vertical integration often leads to the inability to
acquire
›
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, which means Zara cannot gain the advantages
of producing large quantities of goods for a discounted rate. These higher
costs are then incurred for the Inditex Corporation.

(b) Increased costs. Zara¶s speedy and recurrent introduction s of new

products incur increased costs as well. They have higher research and
development costs. They also have elevated costs due to the constant
changeover of production techniques to create their different apparel lines.
That also means that employees must be trained in order to use the new
manufacturing techniques, which again leads to increased costs. Traditional
retailers do not experience higher costs in all of these areas.

(c) Diseconomies of scale. Zara has not invested in distribution faci lities
to support their global expansion. As a result, although it is aware of how to
quickly supply 1,000 stores, they may not be able to supply more retail
locations due to their ³centralized logistic´ model. Even though Zara has been
successful at scaling up its distribution system, 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. This system may work well with the current
 number of stores because majority of the stores are centralized in Europe.
However, 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.

(d) Fast and recurring introduction of new products in different countries

increase costs in R&D: In the manufacturing environment, 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. Also
throughout the season, Zara¶s product development teams are constantly
researching the market by traveling to universities and clubs around the world
to track customer preferences. Additionally, the young, fashionable, and
international staff helps to interpret the desire of the moment (Zara).

(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. The U.S market was subject to retailing
overcapacity, demanded larger sizes on average and as Zara did not have
any distribution or manufacturing facility within United States, all the apparel
were shipped from Europe to the States which incurred a significant
transportation cost.

c


In the light of Zara¶s global expansion in far-off locations like Asia and America, what
modifications according to you, the company has to bring in its supply chain and
why?





1. Zara today has more than 1600 outlets in 82 countries around the world with
more stress and coverage in the European markets. Additionally it is foraying into the
American and Asian markets in a big way. Economics of the various countries also
point that the next major spending markets would be the East Asian as well South
East Asian countries. 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.

2. 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. The model will not work once Zara scales its oper ation. Currently, Zara's
designing, production, distribution and retails stores are tightly coupled
together and operate very closely. Expanding operations in different regions
(America, Asia, Europe etc.), requires addressing different fashion trends at a
 time. Also, given different sizes/ trends in different regions, it would not be
easy to pull a new fashion cloth or apparel from one region and put it in other
region.

(b) Also, scaling its operation may require joint -ventures and acquiring
some smaller chains also. In a 50:50 joint venture, it is very difficult for Zara to
impose its business model to the other partner. In this aspect it has been
noticed that many of Zara's joint ventures dissolving on a couple of occasions.

(c) While Zara may find it d ifficult to manage the vertically integrated
model for its large scales of operation, local retailers may follow Zara's
formula to success and can emerge as big threat to its success, thereby
reducing the market sustainability of Zara at these new markets.

(d) It is not easy to beat the local retailers in their home market. For
example, the Local apparel market in Italy is still owned 61% by the
independent stores, 45% in Spain (Note that this is Zara's local market too)
and 15-30% in other three major European markets. Specially, in countries
with very cheap labour (mostly in Asia), it will be very difficult for Zara to keep
up its production in Spain and subsequent distribution and sale in these
countries.

(e) Zara's business model is based on ever changing fashion. For

countries like US and the other emerging markets of Asia, where people are
less fashion forward and stepped up deep in their culture, it may be a
challenge for Zara to mark its presence and sustain in these markets.

(f) With changing time, Advertisement is becoming an important part of

the business and it reflects directly to the sales. 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.

3. 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.
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. 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. Their second central
distribution facility should be an expansion of one of their smaller distribution
centers located in Argentina, Brazil or Mexico. The close proximity of the
distribution center to the American market will allow them to effectively
interpret the particular American 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.
 (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 . This
would be affecting the model of twice-weekly deliveries that has been key to
defining the Zara experience becomes more expensive to maintain. 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.

(c) Zara should also go for the containerised handling facilities which
provide warehousing facilities in storage and transportation. 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.

(d) Zara¶s winning formula can only exist through management¶s savvy
understanding of how information systems can enable winning strategies. It is
technology that helps Zara identify and manufacture the clothes customers
want, get those products to market quickly, and eliminate costs related to
advertising, inventory missteps, and markdowns. 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. These are generally countries which have a
very potential of risk associated due to the varied tastes and likes. 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. 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.

(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.
Extensive outsourcing has become a key feature of all fast-cycle product
development throughout the various sectors. As Zara has been looking
forward for expansion to the various sectors and going for a global reach,
these aspects should be kept in mind so as to reduce time as well as to
reduce costs.

4. 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. 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. The second factor has been that information can also su bstitute
inventory as has been done by Zara by pre -empting the needs of its customers and
so sustaining a comprehensive edge .

c


Most of the supply chain management efforts by organisations now -a-days are
aimed at minimising costs rather than on maximising revenues. However Zara¶s
supply chain management practises are an exception. 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.






1. 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. 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.

2. 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. 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.

3. The advantages that Zara could most possibly gain from these are :

(a) The fewer the number of firms, the greater are the transaction costs
and bigger the advantages of Vertical Integration, also transaction-specific
investments increase the advantages of Vertical Integration.

(b) The greater are information asymmetries, the more likely is

opportunistic behavio ur and the greater the advantages of Vertical Integration.
This will be able to be effective in the European Markets.

(c) Taxes and regulations are a cost of market contracts that can be
avoided by Vertical Integration, similarly when there are greater uncertainties
concerning costs, technologies, and demand, the greater the difficulty of
writing contracts, and the greater the advantages.

(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. As Zara shall be positioning
themselves to gain a foothold in these markets so greater the need to invest
 in capability development and so the greater the advantages of outsourcing
over Vertical Integration.

(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, and
the greater the administrative disadvantages of Vertical Integration. In these
aspects the greater will be the flexibility advantages of outsourcing. Also for
areas where more heavier the investment requirements and higher the
independent risks at each stage, the more risky is Vertical Integration and
better advantageous will be outsourcing.

4. 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.