Vertical Intergration Zara

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How is Zara organized with respect to its vertical integration and outsourcing decisions? What governance structure does it appear to follow? Support your conclusions with reference to details of the Zara and the Ferdows reading.

Zara manufactures and distributes its products in small batches. Zara is vertically integrated as the company manages all design, warehousing, distribution and logistic functions. Zara outsources sewing of garments to an outside supplier. Zara controls the product it creates from inception to when it is sold to the final customer. Amancio Ortega, Zara’s founder is a strong believer that in order to be successful in the apparel industry retailing and manufacturing must be closely linked as consumer demand is difficult to forecast. Both Ortega and Castellano (Intidex CEO) both believe that Zara needs to be able to respond very quickly to the demands of target customers as their taste in clothes is hard to predict, difficult to influence and changes very rapidly.

Zara’s vertical integration allows the company to constantly introduce new items into the marketplace with very short lead times. The company can design, produce and deliver a new garment and put it on display in its stores with a 15 day turnaround. No other competitor has this capability. While Zara introduces over 11,000 new items in a given year its competitors introduce a mere 2,000 to 4,000. Vertical integration allows Zara the leverage to be super responsive to the eclectic tastes of its customers. Zara does an outstanding job of matching demand to supply. Its sells only 15-20% of its clothes during clearance sales at an average discount of 15% compared to the industry average of 30-40% at a discount of 30%.

Zara produces complicated products in house and outsources the simple ones. Men’s dress shirts for instance are outsourced because of the stable demand in these products. The dress shirts are outsourced to China with a four month lead time and to Turkey with a two month lead time.

Zara purchases most of its undyed fabrics on the external market, although it owns a few textile fabrication facilities. It also outsources the sewing of the fabrics into garments to a network of small local workshops in Galicia and northern Portugal that guarantee quick turnaround times.

Governance Structure:

Ortega and Castellano both wanted to take advantage of the intelligence and trust the judgment of employees throughout the company rather than relying on a small set of decision makers. The company thus has a decentralized structure. Store managers are able to pick and choose what products will be sold at their stores. Products are designed and created by a team of “commercials” rather than a small elite team as many competitors have. These in turn are influenced by store product managers, who are the main interface between stores and the head office in La Coruna. They determine what kind of clothes sell well, what the trends are, and what would most likely sell. There are other “commercials” who decide what assortment of clothes to offer each store. Decisions are not reviewed by any higher level managers and there is a culture of autonomy. Zara believes that second guessing would make the company less responsive and would compromise its emphasis on decentralized decision making.

How does Zara’s situation support, or not support, its supply chain strategy? Refer to specific details of Zara’s operations and concepts developed in Hayes et al (see session notes for a summary of Hayes).

Zara’s supply chain strategy is to control the entire supply chain from product creation to selling the product to the final customer at the retail stores. Amancio Ortega believes that in order to be successful in this industry you need to have five fingers touching the factory and five fingers touching the customer. He knows that retailing and manufacturing have to be closely linked in the apparel industry due to the...
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