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Vertical integration and Zara Retailing
- 1. VERTICAL INTEGRATION & ZARA RETAILING PRESENTED BY- AMKOA, SALLY LIN, XINQI SENECHA, NIHARIKA TOWERS, KATHLEEN
- 2. 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
- 3. 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
- 4. EXAMPLE OF VERTICAL INTEGRATION
- 5. 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.
- 6. 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
- 7. 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
- 8. ZARA’S COMPETITORS Gap H&M Uniqlo Zara Founded US (1969) Sweden (1947) Japan (1984) Spain (1975) Product Smart casual Fashionable apparel Casual wear and essentials Fashionable apparel Price level High Lower than Inditex Lower than Zara - Countries 41 44 12 88 Production Internalized production, 90% from outside of US Outsourced all production Outsourced 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
- 9. 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.
- 10. APPAREL INDUSTRY STANDARD VS 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 Industry Standard ZARA
- 11. 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
- 12. 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
- 13. 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
- 14. 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
- 15. 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
- 16. THANK YOU!
- 17. 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 mber=4677909