Zara: Vertical Retailer

According to Inditex, the Group's business model is characterized by a highly integrated vertical structure. In contrast to the model that has been adopted by competing international corporations, the Group handles all the processes required in the apparel industryвЂ"design, production, logistics, distribution to retail outletsвЂ"on its own. This model is based on a desire for structural flexibility and a belief that the customer should come first in every aspect of the company's operations.

The main elements of this vertical structure can be seen in the retail outlets. The stores are designed with an eye for detail, providing a comfortable venue for the customer to encounter fashion. At the same time, it serves as a site for acquiring the information needed to adjust supplies in response to demand.

The key to this business model is fulfilling the customers' wishes as soon as possible. For Inditex, time is the most important element, the element that they consider ahead of costs. Their vertically integrated structure not only makes it possible to shorten the response time but also allows flexibility and keeps the size of inventories to a minimum, thus controlling the significant source of risk in the fashion industry as much as possible.

What makes the collections a success is that Inditex creates opportunities for many people to review the collections, continually incorporates changes in fashion, and offers new designs that respond to customers' wishes. Making use of the flexibility of its business model, Inditex tries to deliver new products to its stores in as short a time as possible, responding to changes that occur throughout the season.

The models for each season (more than 30,000 of them last year alone) are developed together by the creative departments of the various brands. The sources of inspiration for the 300 designers (of whom 200 work just for Zara) include not just the trends that control the market but the wishes of customers, based on information gathered at the retail outlets.

The greater part of production takes place at Groupowned plants that perform all the processes, from procurement of cloth to marking, cutting, and finishing. Most of the sewing is subcontracted to specialized sewing plants in the northwestern part of the Iberian Peninsula. The majority of the company's outside suppliers are in Europe, and in most cases, they receive cloth and the parts and components needed for making clothes from Inditex. Although the actual percentage varies with the season, 64% of production in 2006 took place in Europe, while 34% took place in Asia. Wherever they are manufactured, the clothes are collected at each brand's distribution center and regularly and frequently shipped out to all the stores around the world at the same time. It takes less than 4 days for a shipment to reach Tokyo from the logistics center in La CoruÐ"±a, and in addition, shipments are sent in exactly the amounts needed twice a week.

Japanese customers account for the highest rate of repeat business among Zara clientele in all countries.

5. Zara manufactures close to half of the clothes sold in its retail stores and undertakes all of its own distribution from manufacturing plants to retail outlets. Gap outsources production and distribution. Should Zara outsource its manufacturing and distribution? Should Gap backward integrate into production and distribution?

Zara вЂ" like American Apparel вЂ" is an interesting and unusual example of a vertically integrated fashion clothing company.

The dominant model in fashion clothing is for retailing and manufacturing to be undertaken by different companies. Thus, Gap does its own design, but its manufacturing is undertaken by contractors, mostly in Southeast Asia. The advantages of this system are:

• It avoids the problem of managing manufacturing plants far away from the retailers’ retail operations and corporate head offices.

• Retailing and manufacturing are strategically dissimilar вЂ" different capabilities, different