Zara It Case Discussion - Vertical Integration Vs Outsourcing

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 case and the Ferdows reading.

In my opinion, Zara’s supply chain is primarily vertically integrated. As Ferdows states, “The company manages all design, warehousing, distribution, and logistics functions itself.”  This conforms to what Zara’s founder had learned early in the company’s life.  Ortega was quoted as saying “you need to have five fingers touching the factory and five touching the customer.”  Zara supports the vertical integration even more by only outsourcing simple tasks such as sewing.  Other outsourcing is even done through companies owned by Zara’s parent company Inditex.  Furthermore, Zara has separated itself into 3 main lines (women, men, and children) and has setup its central production center in-line with these (one for each).  They have decentralized the governance of these channels to allow each one manage itself, which as Ferdows indicates “separate design, sales, and procurement and production-planning staffs are dedicated to each clothing line”

Ferdows had discovered that the entire company sticks to 3 main principles:

1. “Close the communication loop” - The entire chain is setup to expedite the delivery of information from customers to production and design.  This allows the company to react quickly to market changes.
2. “Stick to a rhythm across the entire chain” – The entire chain is setup on a specific ordering process.  Order process, dates & times are clearly defined.  Delivery dates and methods are set based on proximity.  All deliveries are pre-tagged and priced and on racks.
3. “Leverage your capital assets to increase supply chain flexibility” – Major capital contributions to production distribution facilities are made to increase supply chain efficiency.  Outsourcing of simple process is done, keeping the more complicated production in house.

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 summary of Hayes).

Regarding Zara’s IT infrastructure, I would have to say it does support its supply chain strategy.  According to Hayes et al, “Zara’s approach to information technology was consistent with its preferences for speed and decentralized decision making.”  The IS Department has been divided into three groups (Store Solutions, Logistics Support, and Administrative Systems).  Their software has largely been developed in-house to suit their specific needs within these groups.  

Essentially, Zara IT infrastructure is sticking to the company’s 3 main principles:

1. “Close the communication loop” – As the software has been largely developed in-house, it was developed with a single purpose to expedite the delivery of information from customers to production and design.  
2. “Stick to a rhythm across the entire chain” – Zara’s factories and distribution centers utilize automation and computerization.  The computerization aids in providing tracking of garments from raw materials to goods delivered to stores.  Automation aids in handling the materials within the DC to aid in the efficiency of the delivery process.  All stores were given the same POS and PDA hardware.  This kept the ordering process from all stores consistent, and delivery of these orders to production on schedule.
3.  “Leverage your capital assets to increase supply chain flexibility” – Zara has invested in computer controlled equipment within its factories (which reduced waste and increased efficiency)

Unfortunately, there is a difference of opinion between Salgado and Sanchez when it comes to further development of their IT infrastructure.  On one hand, Sanchez believes in the “if it ain’t broke, don’t fix it”, but on the other hand, Salgado believes it’s time to upgrade.  These two trains of thought have pros and cons making it difficult to determine which one should prevail.