Vertical Integration vs Outsourcing

Topics: Decision making, Vertical integration, Supply chain management Pages: 12 (1680 words) Published: October 16, 2014
Vertical Integration vs Outsourcing of Zara
Written by

Mohd Rahman
October 04, 2014

“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.


Introduction to Zara
Zara is an icon in the fashion world and largest international fashion designing and manufacturing company. Zara is the flagship chain store of Inditex Group owned by Spanish tycoon Amancio Ortega, Inditex is one of the world's largest fashion retailers with eight brands and over 6,460 stores throughout the world (Ref-1). Headquarter of the group is in Coruña, Spain where the first store of Zara was launched in 1975. This paper will analyse the company and try to link its activities with supply chain strategy of vertical integration and outsourcing. Later will come to a conclusion that Zara is vertically integrated with justification and made recommendation for further improvement.

Definition of Vertical Integration
In strategic management, the term vertical integration describes a style of management control, when a company expands its business into areas at different points of the same production path. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or services, and the production combine to satisfy common need. In the following paragraph I will try to highlight the organization and decision-making process of ZARA in short

Brief Organization and Decision-Making Process of ZARA
The followings are the most critical factors of Zara’s operation: Decision Making: The decision making process is based on judgement of employee instead of relying on small set of decision makers; the majority of decisions are made by store managers and designers

Target market: Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara’s


target market is a young, educated one that likes fashion and is sensitive to fashion
Procurement : Establishing merchandise sources, policies and practices. Retail Environment: Zara’s managers and sales associates are in charge of transmitting the sales analysis, the product life cycles, and the store trends to the designers. This allows the designers in Spain to develop the right products within the season to meet consumer demand

Speed & Decision Making: Zara responds quickly to demands. Store managers have more authority than other stores such as deciding the garment to be put on sale. ‘Commercials’ decide which garments to be produced & sold. Have great deal of autonomy as higher management doesn’t second guess their decisions Ordering & fulfillment: Manual inventory management

based upon direct

observation & store manager judgment, Use of PDA’s, Infrared, dial-up modem for order management, Process is complicated & divided in various steps such as breaking order into segments and beaming these segments to concerned person who then filled up their part

Design & manufacturing: Maximum time from conception to distribution centre is three weeks.
Prices and services: Zara product price is affordable , provides prepurchase service, postpurchase service, ancilary service.
Store atmosphere : Zara store’s are identical and designed by own team, stays update through the website.
Marketing, merchandising & advertising: Zara is broadly and deeply assorted. Very low spending on marketing (Only .03%) while heavy spending on stores, No


‘classics’ clothes but clothes with very short lifespan forcing customers to buy it on the spot, visit stores often
Location and distribution : Zara locates themselves in central


districts with as many outlets as possibe. Zara has centralized distribution facility, It’s internally or externally produced merchandise goes to the...
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