Zara Case

Zara, Rittenhouse Square, Philadelphia, PA / Photo by Tsedey Bogale on Google Maps

The Zara case provides us with an interesting example of value chain integration that runs contrary to many of their competitors. Rather than outsource all manufacturing and sell through others retailers, Zara's value chain includes a significant vertical integration component.

Many of you identified Zara's stores as an example of forward integration. But Zara's most unusual approach is their backward integration highlighted by Eddie and Michael. As Kristen and Jacob note, Zara makes 40% of their own fabric and 60% of their own merchandise. Key to their vertical integration are the lean and just-in-time practices identified by Julie, Kristen and Andrew. We'll talk more about "lean thinking" in the weeks to come. The key thing for us to understand at this point is that lean manufacturing and just-in-dime processes significantly reduce waste of all types in the value chain. This helps deliver savings to the organization. Think back to our Interface discussion in class... Interface financed their product and equipment innovations through savings garnered through lean practices. For Zara, lean and JIT help address Tim's question regarding the risk of being on the cutting edge of fashion: what do you do with leftover inventory when customer taste changes? Zara has a lower unsold item rate than the industry average, and they get closer to full price on the clothes they sell than most other fashion retailers. (See the Berfield and Biagorri (2013) Bloomberg Business article.)

Some of your most interesting questions and discussion centered on the value this vertical integration creates for Zara customers, and whether this model can be duplicated by competitors. Julie helps us with this discussion by first clearly linking the value created in the value chain with our value equation (see Collier, 2015, p. 26) and the customer benefit package (CBP) discussed in chapter 1. It is this relationship between affordable price (driven by Zara's lean/JIT value chain) and leading-edge fashion that creates value for Zara customers. Julie, Katie, Kristen, Lauren, Andrew, Kyle, Mario, Michael, and Ryan all ask or discuss this question: can Zara's model be duplicated? Perhaps, but not easily. In a future case we'll see the steps that H&M has taken to speed new fashions to their stores, but they do so without attempting the vertical integration we witness in the Zara model.

So what is it that makes this model so difficult to duplicate? More to come as our study of OM progresses this semester.

Reference

Collier, D.A. & Evans, J.R. (2015). OM5, Boston: Cengage Learning.