Economics and Zara

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Case Analysis of ZARA: Fast Fashion

a. Limitations of Vertical Integration
Vertical integration, a distinctive feature of Zara’s business model, has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. However, Zara’s strategy creates some weaknesses. Their vertical integration has more advantages than drawbacks but it is important to recognize its limitations. Vertical integration often leads to the inability to acquire economies of scale, which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate. Higher costs are then incurred for the Inditex Corporation.

Inditex also has to support their own high capital investments for their chains and be able to financially back their “Technology and skills” beyond those currently available within the organization. Zara’s speedy and recurrent introductions of new products incur increased costs as well. They have higher research and development costs. They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. That also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers do not experience higher costs in all of these areas.

b. Diseconomies of scale: Zara has not invested in distribution facilities to support their global expansion. As a result, although it is aware of how to quickly supply 1,000 stores, they may not be able to supply more retail locations due to their “centralized logistic” model. Even though Zara has been successful at scaling up its distribution system, the centralized logistics system might eventually be subject to diseconomies of scale as Zara continues to open stores all around the world and ships product from its single Distribution Center in Europe. This system may work well with the current number of stores because majority of the stores are centralized in Europe. However, Inditex won’t be benefiting from short lead times and low operational cost with a single central Distribution Center model as they are branching out into other countries.

c. Fast and recurring introduction of new products in different countries increase costs R&D: In the manufacturing environment, Zara’s product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Also throughout the season, Zara’s product development teams are constantly researching the market by traveling to universities and clubs around the world to track customer preferences. Additionally, the young, fashionable, and international staff helps to interpret the desire of the moment (Zara).

Changeover of production techniques to create different apparel lines requires highly automated equipment specialized by garment type. The more flexible the system is, the more costly the production will be. In addition, employees need to be trained to use new manufacturing techniques

c. Developing vertically integrated supply chain system in different countries with high labor cost will result in high production cost Zara Management is considering investing in distribution and production in new regions they are expanding into. North America and Asia seemed to be the obvious regional opportunities. The U.S market was subject to retailing overcapacity, demanded larger sizes on average. Zara is already in major cities in the United States. Since Zara does not have any distribution or manufacturing facility within United States, all the apparel is shipped from Europe to the States which incurs a significant transportation cost.

Short term
Renegotiate overseas shipping costs and terms.
Building new plants and equipment is very expensive and takes a lot...
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