1. 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.
Vertical integration occurs when a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. This definition of vertical integration applies to Zara as they own many aspects of their supply chain. Zara is vertically integrated to maintain control over their supply chain to coincide with their ‘fast-fashion’ business plan. Fast-fashion is a term to coin the fact the fashion trends turn over very quickly. People will shop more frequently and return to retail locations more often the items are limited and replenished regularly.
Based on Ferdows reading, Zara manufacturers and distributes almost all of its products. They do not rely on outside partners to design, warehouse, distribute as it is all done in-house and outsourcing is kept to a minimum. The balance between outsourcing activities such as standard, every day items and vertical integration promotes flexibility and allows product to reach the market in 15 days while keeping cost down for everyday items.

The governance structure allows the various decision makers to make quick decisions. Zara’s philosophy is that the judgement and expertise of their employees are to be trusted instead of just relying on a small group of decision makers. This type of governance is unique and would not work for all companies. Zara strategy promotes autonomy and this type of governance structure works for them.

2. 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).

Per the Hayes article, outsourcing decisions are strongly tied to an organizations competitive strategy. Zara’s supply chain strategy is that “you need five fingers touching the factory and five fingers touching the customer”. This means that control must be maintained from the beginning until product reaches the customer.
Per Hayes, a key decision for a firm is to decide which activities should be conducted in-house and which activities should be outsourced. Zara designs, manufactures and distributes most of its product line with a small section of standard product such as everyday items like t-shirts being outsourced.
Zaras situation supports this as they can design, produce and have product on shelves in 15 days. This is much quicker that their competition and allows them to produce 11,000 items a year instead of the average industry standard of 2000-4000. They are in control of all aspects of design and production which allows them to achieve this amount of apparel. The fact that they limit their production of certain style of clothing promote shoppers to buy now instead of wait as items may not be available next time they return. It also ensures that shoppers will return frequently as they are aware that new items arrive every week. The strategy combined with the vertically integrated supply chain maintains the company’s overall vision of fast-fashion.
3. Is Zara organized properly with respect to vertical integration or outsourcing? What changes, if any, would you recommend? State the reasons for your recommendations.
Zara is organized properly with respect to vertical integration more so than they are with outsourcing activity. Zara owns its manufacturing and distribution centers as well as designs product lines for women, men and children in-house.
I would recommend that Zara create a supply chain map if one is not already in place. This map would allow the entire supply chain to be documented (if it already isn’t) and allow management and decision makers to see where