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
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:
A firm that manufactures a product through an assembly process
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
“The original business
idea was very simple.
Link customer demand
“Super-responsive” buyer driven supply chain to manufacturing, and
Customer is the main driving force behind the Zara brand. link manufacturing to
distribution. That is the
Quick design to distribution process idea we still live by. ”
Maximum time from conception to distribution center in 3 weeks
Zero Advertising
Very low spending on marketing while high spending on stores
Vertically Integrated
Jose Maria
Castellano Rios,
Inditex CEO
ZARA’S COMPETITORS
Gap H&M Uniqlo Zara
Founded US (1969) Sweden (1947) Japan (1984) Spain (1975)
Fashionable Casual wear and Fashionable
Product Smart casual apparel essentials apparel
Price level High Lower than Inditex Lower than Zara -
Countries 41 44 12 88
Internalized
production, 90% Outsourced all Outsourced most In-house
Production from outside of US production of the production production
Engaged in Focus on
extensive developing long
advertising and lasting and high-
employed fewer quality clothing, Vertical
Strategies 3 store chains designers high production 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
Industry
ZARA
Standard
Quick popular and novel designs; more concerned
Design 6 months w/ quick production of saleable items than
originality
3 months, Fashionable (i.e. time-sensitive) items produced
usually
Manufacture outsourced to
locally: 12 to 15 days
other countries Basics outsourced to cheaper producers
2-3 weeks by Delivered by truck and air Europe in 24-hours
sea to regional
Distribution centers and on
to Company-owned stores USA in 24-48 hours
to franchisees tagged w/ in-country pricing: Asia in 48-72 hours
SWOT ANALYSIS
Strength Weakness
• Fully vertically integrated (Full control) • Brand image closely tagged to competitors
• Tight communication loop( operates to meet • Target segments is not extremely consumer-
demand) loyal
• Fast delivery • No advertising
• Global outreach • Low quality & Limitation on Services
Threat Opportunity
• Fierce competition • Online market and E-retail
• Possible imitation of goods • International expansion especially in
• Economic downturn emerging market
COMPETITIVE ADVANTAGES OF VI FOR ZARA
1. Owning shops
gives it insights into
2. Flexible in the variety,
what its customers
amount, and frequency
really want
of the new styles they
produce
3. Helps make its
manufacturing
operations more
nimble
COMPETITIVE ADVANTAGES OF VI FOR ZARA
4. Create fast
fashion system 5. Centralized
control, avoid
misunderstanding
or conflicts
6. Manageable time
scheduling, focused
on one time schedule
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
KEY TAKEAWAYS FROM ZARA RETAILING
Supply chain risk: Implications:
• Staying with the speed • Innovation comes from
• Too Speedy? dialogue between new
• Cross-market boundaries technology and
strategy
• Position of store
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&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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