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VERTICAL

INTEGRATION &
ZARA RETAILING
PRESENTED BYAMKOA, 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 companys 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

High-end market

Compete on pricehold largest market share

Compete on brand equityhave biggest profit margin

Affordable fashion clothesZARAs market segment

Compete on speedcustomers 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, Zaras 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

ZARAS BUSINESS MODEL &


STRATEGY

Super-responsive

buyer driven supply chain

Customer is the main driving force behind the Zara brand.


Quick

design to distribution process

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.

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

ZARAS COMPETITORS

Gap
Founded

US (1969)

Product
Price
level
Countrie
s

Smart casual
High

H&M

Zara

Spain
Sweden (1947) Japan (1984)
(1975)
Fashionable
Casual wear Fashionable
apparel
and essentials apparel
Lower than
Lower than
Inditex
Zara
-

41
44
Internalized
production, 90%
Producti from outside of Outsourced all
on
US
production

Strategi

Uniqlo

12

88

Outsourced
most of the
In-house
production
production
Focus on
Engaged in
developing
extensive
long lasting
advertising
and highand employed
quality
fewer
clothing, high
Vertical

ZARAS 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

Ordering

to proximity= Scarce supply

& 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
Standard

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

SWOT ANALYSIS
Strength

Fully vertically integrated (Full control)


Tight communication loop( operates to
meet demand)
Fast delivery
Global outreach

Weakness

Threat

Fierce competition
Possible imitation of goods
Economic downturn

Brand image closely tagged to competitors


Target segments is not extremely
consumer-loyal
No advertising
Low quality & Limitation on Services

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

4. Create fast
fashion
system

5. Centralized
control, avoid
misunderstandin
g or conflicts

6. Manageable time
scheduling, focused
on one time
schedule

CHALLENGES IN ZARAS 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:
Staying with the speed
Too Speedy?
Cross-market
boundaries

Implications:
Innovation comes from
dialogue between new
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. 2008http://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=467
7909