Vertical Integration in the Fashion Industry: Strategies, Benefits, and Challenges Case Study

Vertical Integration in the Fashion Industry: Strategies, Benefits, and Challenges

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Introduction: Vertical Integration in the Fashion Industry: Strategies, Benefits, and Challenges

Vertical integration is one of the most talked-about transformations that the fashion industry has undergone in recent years. A condition known as “vertical integration” occurs when a corporation has control over multiple elements of the supply chain, from the raw materials to the finished item (Yang et.al 2017). This essay's goal is to compare Zara’s policies from two of its competitors and explore the benefits and disadvantages of vertical assimilation in the fashion industry.

The vertical integration choice is first defined in this report, followed by a discussion of transaction costs. The influence of vertical integration on each of the important phases of the fashion value chain, including design, sourcing, production, distribution, and retail, will next be assessed (Sudha and Sheena, 2017). Lastly, this report will contrast the procedures followed by Zara and two of its rivals, examining the methods used and the effects vertical integration has had on each company's operational performance metrics and sustainability.

Industry and company background

The fashion business is a very competitive and dynamic field. An intricate supply chain for the sector includes several phases, including design, sourcing, manufacture, distribution, and retail (Moorkens et.al 2017). Sustainability, quality assurance, product innovation, and speed to market are the main quality concerns facing the sector.The well-known fast-fashion brand Zara, a division of the Spanish clothing corporation Inditex, has achieved success in the market because of its distinctive business strategy. Zara has a vertically integrated supply chain that enables them to manage every stage of production, from design to distribution (Garca-lvarez, 2015). This tactic has assisted Zara in being more responsive to client requests, cutting down on lead times, and maintaining low inventory levels.

H&M, a worldwide fast-fashion corporation based in Sweden, uses a supply chain that is only partially integrated and outsources some components of production to independent producers. H&M has put a strong emphasis on sustainability, launching a number of environmental friendly items and using sustainable production techniques (Schmidt and Wagner, 2019).

Chanel, a premium clothing company, runs a completely integrated supply chain and has complete control over every stage of manufacturing, from sourcing raw materials to retail distribution. Chanel has been able to preserve its image for high-quality items and exclusivity because to this tactic.

Two theories will serve as the analyses' frameworks as the report weigh the advantage and disadvantage of vertical integration in the stylezone:

Agency theory and transaction cost theory

Transaction cost theory

According to the principle of transaction costs, which include the expenses of searching, haggling, negotiating, and monitoring, businesses decide between external and internal transactions (Akbar and Tracogna, 2018). Vertical integration may lower transaction costs in the fashion sector by consolidating control over various value chain stages, eliminating the need for market transactions and middlemen. In order to adapt rapidly to current trends, maintain quality control, and shorten lead times, Inditex's fashion brand Zara, for instance, integrates vertically by controlling its production, distribution, and retail operations.

Agency theory

Contrarily, agency theory describes how fights of interest can develop among a principal and an agent in a corporate relationship and how oversight procedures can help to resolve them. Conflicts between brands and suppliers in the fashion business can occur when the latter compromises quality in order to minimise costs, for example. Like in the instance of Zara, which controls 80% of its production facilities and contracts out the other 20% to vendors that adhere to its quality and sustainability requirements, vertical integration can eliminate these conflicts by matching the interests of the principal and the agent (Panda and Leepsa, 2017).

To assess the influence of vertical integration on six performance criteria in the fashion industry, the following analysis will be conducted:

• Quality: By having internal design, production, and quality control teams, vertical integration may help businesses regulate the quality of their goods. For instance, Zara is renowned for its quick fashion and on-trend looks, which it achieves by outsourcing just a small portion of its design and production.
• Speed: By minimising the lead periods between design, production, and distribution, vertical integration can result in a shorter time-to-market (Shogrenal 2017). For instance, Zara can introduce new designs to the market in two weeks as opposed to the industry average of six months thanks to in-house production and distribution.
• Dependability: By placing multiple stages of the value chain under one company's management, vertical integration helps lower the risk of supply chain interruptions (Kayikci, 2018). For instance, Zara's vertically integrated operations provide it the ability to react swiftly to supply chain interruptions brought on by things like bad weather, strikes, or delays in transportation.
• Flexibility: By giving businesses more control over their operations, vertical integration may help them swiftly react to shifting market conditions. Zara, for instance, can modify its production and inventory levels in reaction to consumer demand and fashion trends because to its vertical integration.
• Cost: By lowering transaction costs and boosting economies of scale, vertical integration can have an impact on production costs and profitability (Wagner,al 2017). Zara's vertical integration, for instance, helps it to save costs by getting rid of middlemen and lowering inventory levels.
• Sustainability: By giving a firm more control over its supply chain and manufacturing procedures, vertical integration may have a positive influence on its social and environmental impact. By employing sustainable materials and cutting waste, for instance, Zara is able to monitor and manage the environmental effect of its production processes thanks to its vertically integrated operations.

Key Findings

Academic publications, official corporate websites, annual reports, and other data sources will all be utilised in this research to confirm its validity. In order to maintain academic integrity, all data and information sources shall be properly attributed (Gökalpet.al 2017). In addition, the research will take into account several fashion value chain phases, such as design, sourcing, manufacturing, logistics, and retail, to offer a thorough evaluation of the effects of vertical integration on the operations of the fashion sector.

Conclusion

The report is concluded that the businesses are always looking for strategies to obtain a competitive edge in the extremely competitive fashion market. Vertical integration is a tactic that corporations can use. Improved supply chain management, lower transaction costs, and more operational efficiency are all benefits of vertical integration in the fashion sector. There are drawbacks, too, include higher capital costs and the possibility of being overly dependent on one provider.

Zara's adoption of a highly integrated supply chain architecture has allowed the firm to achieve quick fashion and operational excellence. While not to the same extent as Zara, Zara's rivals H&M and Forever 21 have also somewhat consolidated their supply chains. Quality, speed, reliability, flexibility, affordability, and sustainability are just a few of the operational performance metrics that the organisations' varying levels of vertical integration have a big influence on.

It is advised that businesses in the fashion sector use a hybrid strategy to vertical integration in light of the findings. Companies should carefully weigh the benefits and drawbacks of vertical integration before deciding on the level of integration that is best for their particular company model. They should also keep an eye on their supply chain to make sure it is effective, sustainable, and able to adapt to changing client demands.

Choosing to integrate vertically is a difficult decision, thus businesses in the fashion sector should carefully weigh the benefits and drawbacks before deciding. Although vertical integration may enhance operational performance, businesses must also take into account the hazards involved and make sure they have the tools and resources needed to manage a fully integrated supply chain.

References

Akbar, Y.H. and Tracogna, A., 2018. The sharing economy and the future of the hotel industry: Transaction cost theory and platform economics.International Journal of Hospitality Management,71, pp.91-101.

García-Álvarez, M.T., 2015. Analysis of the effects of ICTs in knowledge management and innovation: The case of Zara Group.Computers in Human Behavior,51, pp.994-1002.

Gökalp, E., ?ener, U. and Eren, P.E., 2017. Development of an assessment model for industry 4.0: industry 4.0-MM. InSoftware Process Improvement and Capability Determination: 17th International Conference, SPICE 2017, Palma de Mallorca, Spain, October 4–5, 2017, Proceedings(pp. 128-142). Springer International Publishing.

Kayikci, Y., 2018. Sustainability impact of digitization in logistics.Procedia manufacturing,21, pp.782-789.

Moorkens, E., Vulto, A.G., Huys, I., Dylst, P., Godman, B., Keuerleber, S., Claus, B., Dimitrova, M., Petrova, G., Sovi?-Brki?i?, L. and Slabý, J., 2017. Policies for biosimilar uptake in Europe: an overview.PloS one,12(12), p.e0190147.

Panda, B. and Leepsa, N.M., 2017. Agency theory: Review of theory and evidence on problems and perspectives.Indian journal of corporate governance,10(1), pp.74-95.

Schmidt, C.G. and Wagner, S.M., 2019. Blockchain and supply chain relations: A transaction cost theory perspective.Journal of Purchasing and Supply Management,25(4), p.100552.

Shogren, K.A., Wehmeyer, M.L. and Palmer, S.B., 2017. Causal agency theory.Development of self-determination through the life-course, pp.55-67.

Sudha, M. and Sheena, K., 2017. Impact of influencers in consumer decision process: the fashion industry.SCMS Journal of Indian Management,14(3), pp.14-30.

Wagner, T., Herrmann, C. and Thiede, S., 2017. Industry 4.0 impacts on lean production systems.ProcediaCirp,63, pp.125-131.

Yang, S., Song, Y. and Tong, S., 2017. Sustainable retailing in the fashion industry: A systematic literature review.Sustainability,9(7), p.1266.