GROUP 3

Prajwal Corriea Roll No 10 Sandeep Dass.Roll No 11 Nandkumar Pagade..Roll No 32 Anand SurveRoll No 51 Kunal Tejwani Roll No 53 Amar Thakkar....Roll No 54

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

Zaras Vertical Integration

In 2004, Zaras holding company Inditex, owned about 100 companies engaged in activities like textile purchasing, manufacturing and logistics. Due to this, Zara was able to vertically integrate its operations.

Eg: Comditel specialised in procuring undyed fabrics which could be dyed or printed as per the order.

Zaras Vertical Integration

Designing Zara has a team of dedicated designers, who travel across the globe and follow the new trends. It has 3 design centers one each for men, women and kids apparel. Its store managers also possess designing skills.

Zaras Vertical Integration

Production The fabric was cut at Zaras own hightech automated cutting facilities, based on styles and sizes. This was done based upon the computer layout of the sample pieces; so as to minimize the wastage. Due to this flexibility, Zara was able to stop its production for any design with low demand and modify its processes for designs with high demand. The garments are checked twice for quality, ironed , tagged, packed and sent for dustribution

Zaras Vertical Integration

Distribution Carried out at Zaras 500000 sq.m. distribution center in Arteixo. This center located centrally among 14 manufacturing plants in La Coruna. Zara has its own railway track of 211 km through which goods are moved to the distribution center. Once the trucks reach the stores, the garments are put on display right away since they are pre priced, tagged and already ironed. Due to all this, Zara was able to achieve an accuracy level of 98.9% in its shipments.

Advantages of VI
In distribution, Zara owned its own railway tracks which was the heart of the centralized distribution process.
Merchandize was pre-priced and ironedready to be directly placed on shelves If zara moved away from its centralized distribution process it would struggle in keeping the costs low in that domain.

Advantages of VI
Zaras VI is able to fulfil demands of customers for a rapidly changing trend and fad pattern specific to fashion retailing
Zara was able to compete with international stores in its expansion spree and became third largest retailer in terms of revenues Customized deliveries based on Data exchange between functions

Advantages of VI
Ability to conceptualize garment, develop and deliver it to the stores within two or three weeks Globetrotting fashion trend hunters were Spotting new trends and siphoning off information to designers (made possible due to seamless integration
Zara customers visited stores 17times a year instead of 3-4 times, with new styles being introduced every week the customers visited more often Low inventory and high margins

Advantages of VI
Ability to conceptualize garment, develop and deliver it to the stores within two or three weeks Globetrotting fashion trend hunters were Spotting new trends and siphoning off information to designers (made possible due to seamless integration
Zara customers visited stores 17times a year instead of 3-4 times, with new styles being introduced every week the customers visited more often Low inventory and high margins

Advantages of VI
Inhouse design and production helps supply fresh designs to retailers twice a week throughout the year Customers made their purchases earlier due to the looming uncertainty of losing the opportunity of buying them later Zaras low economies of scale worked as a benefit rather than a shortcoming in terms of creating a scarcity value since it could not use mass production and in turn used this to maintain exclusivity.

Advantages of VI
The information flow from the sles taff to the store manager to the head office was very rapid in terms of the kind of merchandize the customers demanded (colors, style and fabrics).
Detailed industry specific bits of information to be shared between various functions making integration indispensible. Sales staff, store managers, store specialists, designers and procurers &production managers needed to be on the same page which was made possible by having all of them occupy spaces within the same building.

Advantages of VI
Easy approvals of the designs and CAD final cut as all teams were in one place Zaras own design and collections were retailed owing to VI and independence from the traditional demands of the retailers
Zaras own automated fabric cutting factories were able to optimize production efficiencies and drive down costs and avoid wastage Enabled them to not be dependent on limited cutting technologies of third party cutting firms.

Advantages of VI
These processes reflected fashion and design expertise were chosen to be produced indigenously. Due to flexibility in the production process, zara was able to stop production when demands stooped low or produce more designs in demand
Not much stock to be discounted Zara could immediately realign its resources in case there was a certain seasonal failure of a collection.

Disadvantages of VI
To control costs, fashion retailers are moving their manufacturing processes to Asian countries like India and China. Hence, to stay competitive Zara will not be able to continue with its supply chain model for too long.
Zara has centralized distribution center. It would pose a hindrance to its aggressive expansion to far off locations in Asia and America, since it would increase costs on distribution Also another main disadvantage of VI is the lack of economies of scale, since Zara was unable to reap the advantage of producing large quantities of products to sell at competitive prices.

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

Present Scenario
Present Scenario
Fastest delivery time as well as twice in a week deliveries. Similar speed to market experienced in groceries but unheard of in fashion retailing Accuracy level = 98.9 Percent

Distribution of Garments carried out at Zaras 500,000 Sq Mt Distribution Center in Arteixo 2002 : One more plant opened at Zaragoza in Spain
All the garments were pre priced and and the lots were labeled according to their destination

Present Scenario
Loading Docks Fleets of trucks took goods at their destinations Twice a week garments were shipped of to the distribution center

Time Taken Stores within Europe : 24hrs to 36 hrs Outside Europe : 2-3 days

Solution
The majority of Zaras production includes workers from Portugal and Spain The cost of labour is five times in comparison to countries such as India and China The economies of Asian sourcing work better for some luxury companies than fast fashon retailers because the margins on more expensive goods arent affected as much by the cost of putting them on a place.

Solution
Changes Required 1) Modify Distribution System Move away from its centralized distribution by establishing remote distribution centers in varied locations of operations.
2) Upgrade IT Infrastructure Move away from the present methodology or IT infrastructure to advanced ERP enabled modules 3) Decentralize Production Process Create production centers for a cluster of countries along with individual distribution centers for each country

Why?
Vertical Integration Disadvantage : Lack of economies of scale. Zara would be unable to reap the advantages of mass production due to its business model that focuses on exclusivity of stock
Cost of Labour : Presently, Zara employs labour primarily from Spain and Portugal The cost of labour from these countries is five times as compared to that from countries such as India and China.

Most of the SCM efforts by organizations nowadays are aimed at minimizing costs rather than on maximizing revenues. Zaras SCM practice is an exception. Should Zara continue with these practices or modify. Justify and take a stand

Present Scenario
Instead of projecting sales for a certain colour, fabric or style and launching such products, Zara reacts swiftly to the emerging trends in the fashion industry.
Some of the unique characteristics of Zara that command the existing SCM system are Styles change every week Producing a product in limited quantity Pull process instead of forecasting to gauge market trends

Present SCM systems

Thus, the business model required Zara to remain competitive through increased speed to market
Defying conventional wisdom, Zara adopted these high cost SCM practices that included Three Product Lines Shipment through planes and trucks against ships and trains Deliveries twice a week Shipping garments on hangars (Thereby removing advantages of unitization)

Our view
The present SCM practices are helped Zara maintain low inventory. These practices arent focused towards minimizing costs but maximizing revenues.
The present SCM strategy is also not scalable, while expanding to places far off from the country of origin In its broader scope and larger goal of global expansion, Zara should do away with the existing SCM practices of centralized production and distribution and welcome adoption of production in countries with lower costs of production.

THANK YOU
Prajwal Corriea Roll No 10 Sandeep Dass.Roll No 11 Nandkumar Pagade..Roll No 32 Anand SurveRoll No 51 Kunal Tejwani Roll No 53 Amar Thakkar....Roll No 54