VERTICAL

INTEGRATION &

ZARA RETAILING

PRESENTED BY-

AMKOA, SALLY

LIN, XINQI

SENECHA, NIHARIKA

TOWERS, KATHLEEN

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

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

EXAMPLE OF VERTICAL INTEGRATION

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.

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

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

ZARA’S COMPETITORS

Gap H&M Uniqlo ZaraFounded US (1969) Sweden (1947) Japan (1984) Spain (1975)

Product Smart casualFashionable

apparelCasual wear and

essentialsFashionable

apparelPrice level High Lower than Inditex Lower than Zara -

Countries 41 44 12 88

Production

Internalized production, 90%

from outside of USOutsourced all

productionOutsourced 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

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.

APPAREL INDUSTRY STANDARD VS ZARA

Design 6 monthsQuick 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

StandardZARA

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

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

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

CHALLENGES IN ZARA’S VI SYSTEM

1. DesignHow to coordinate the local customers’ preferences

2. ManufacturerQuality and perception issues

3. LogisticsLocal transportation costs

4. RetailCustomer retention

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

THANK YOU!

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&isnumber=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&isnumber=4677909