OPERATIONS MANAGEMENT
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The substantial effects of Covid-19 on brands have necessitated these businesses to change their business approach to maintain market share, customer base, and profits. The shifting global economy to an internet-based model because of restrictions caused by covid-19, where companies exploit the global market dynamics, has created a unique situation for large apparel companies (Sen et al., 2020). Outsourcing supply enables companies to reduce costs but exposes the firm to risks associated with tracking products. Firms with insourcing models enjoy the control of product quality and good visibility but have limited flexibility (Aftab et al., 2018). These companies experience problems when moving their productions across geographical locations in times of pandemics. Inditex is a world-leading fashion and clothing retailer based in headquartered in Galicia, Spain. The vertical integration model applied by Inditex, which depends on customer interaction, faced a unique situation where the company needed to change to online business to interact with consumers. Inditex has a highly centralized operations system with a customer-centric focus. As an operations manager at Inditex, I have compiled a summary that details the pros and cons of both vertical and horizontal integration. The paper also recommends the best integration strategy and presents ways to implement the plan.
Vertical integration focuses on an in-house operations strategy where the company handles the designing, manufacturing, distribution, and retailing of its products (Youn, Lee, and Ha-Brookshire 2021). Vertical integration also means the acquisition of a company by another operating along the same supply chain. The major aim of vertical integration is smoothening the supply chain process. Inditex operates a highly vertical integration in its business operations, controlling the designing of its products based on customer feedback from its retail shops, fashion shows, and editorials. The company’s factories manufacture all the products from marking, cutting garments, and producing the final brand. The organization maintains two shipments weekly to its stores across the world. The Inditex retail stores spread across the globe handles customer experience with employee-customer relations observed. The retail store employees collect customer feedback to design brands that match customer opinions.
Vertical integration has several benefits, including control that enables the company to reduce the costs associated with production, logistics, and data management. This control is essential in the current pandemic environment as it allows the company to gather information, apply it in the design, and manufacture customer-oriented products. Secondly, independence from suppliers enables the company to manage the unpredictability of producing, obtaining supplies, and labor strikes. The covid-19 pandemic provided an unpredictable business environment where fully observing contractual obligations became difficult. Vertical integration allows the company to determine whether to increase or reduce productions without the risk of breaking contracts. Finally, lower prices of high-quality products attract a considerable customer base since the company saves transportation and operational expenses, reducing the cost of products. The company uses this strategy to gain market control, eventually reaching a broad market since it offers value for products.
The approach exhibits several drawbacks, such as how pandemics and unpredictable geographical calamities adversely affect companies with vertical integration by forcing them to change their rigid supply chains. Inditex value customer satisfaction more than production cost; therefore, the covid-19 pandemic increased restrictions on movement, adversely reducing customer interaction. Also, Europe’s high manufacturing costs discourage companies with vertical integration from investing across national boundaries. The covid-19 pandemic reduced Inditex’s ability to expand supply across continents since capitalist nations such as China favor companies that deal with minor roles in the supply chain clashing with Inditex’s strategy.
Horizontal integration involves a company merging or acquiring another in the same industry to strengthen its market position. The primary aim of horizontal integration is to increase the production and size of the business. The company may have total control or minimal control over the processes in the company depending on the level of integration (Schewe et al., 2015). The acquisition of Pixar by Walt Disney represents an example of horizontal integration.
The benefits of this strategy include companies’ increased size from merging attracts major organizations to this business strategy due to the unpredictable effects of covid-19. The strategy offers participants access to a broader market, reduced competition, and sharing of production costs. Furthermore, the strategy enables companies to achieve economies of scale and increase market share. This strategy attracts a considerable consumer base and boosts revenue by reducing production costs as companies share costs. Additionally, outsourcing supply and shifting the location to a more favorable country can mitigate the risk of shutting down production due to covid-19. Finally, companies with horizontal integration retain flexibilities in the covid-19 environment since they can merge with suppliers in countries with movement restrictions and fully utilize the customer base of such countries.
The approach has several significant drawbacks, such as management difficulties because of an ample supply chain that requires precise management, which is difficult in covid-19 climate. The approach also attracts frequent regulatory scrutiny from government authorities that destabilizes normal operations. This strategy reduces customer choice since merging companies produce similar products and control market prices, severely affecting competition and quality.
I prefer implementing horizontal integration for the next ten years because of its flexibility in the unpredictable nature of the covid-19 pandemic. Inditex can benefit from the dynamic consumer demand shifting to online interaction.
To implement horizontal integration, we focus on assessing the impacts of the pandemic on businesses. The unpredictable effects of the covid-19 pandemic represent a critical challenge to the apparel industry (Sarkis 2020). Customers have now shifted to online media to shop for clothing and rely on home delivery due to the movement restrictions in many countries. Inditex has suffered massive losses leading to the closure of many stores worldwide. Inditex has a customer-centric approach to its operations and depends on physical advertisement and interaction with customers, something difficult due to covid-19 disruptions. The company also manufactures all its products in Spain, further affecting its supply to its worldwide stores leading customers to change brands.
To implement horizontal integration, the company needs to identify its strong consumer demand and initiate a partnership with local apparel factories to supply its stores. The company then can design the products based on consumer feedback and allow the factory to manufacture the products. This strategy ensures the company does not lose money through advertising instead of projecting the money to improving the production process (Popescu 2015). Inditex will still maintain its retail stores and gather customer information, therefore, control all aspects of design based on customer opinions.
Inditex can explore the shift in consumer behavior to online interaction by introducing new technological standards that favor customer interaction. This standard includes using non-advertising methods such as product placement to reach consumers. The company can identify social media platforms and influential social figures and partner with them to increase consumer attraction. Inditex can utilize the great growth and innovation on logistics software and tracking technology such as blockchain solutions and tracking products worldwide. While insourcing supply enables Inditex to leverage on its considerable customer experience, the opportunities provided by outsourcing will allow it to explore the remarkably low labor and production costs in Asian countries.
The following recommendations provide an insight on the best possible way to benefit from horizontal integration fully. First, horizontal integration offers many benefits for apparel companies during the covid-19 induced disruptions. Inditex should leverage the gaps provided by the covid-19 pandemic, which includes more online interaction with customers. The company should consider partnering with companies with new technologies that anticipate the parabolic demand of fashion trends. Fashion products usually have value for short periods, with customer opinions quickly shifting to recent trends (POPESCU 2015). Inditex can deal with logistics, design, and retailing, while their new partners can deal with innovating new technologies that attract more online traffic to Inditex’s products. This strategy will enable Inditex to manage the parabolic nature of fashion products and improve its customer experience.
Second, the pandemic has created a need for flexibility, with companies setting up more distribution centers to match the increased consumer demand. The company can expand its operations to generate higher economies of scale, increase market share, and boost revenue. With more customers ordering products via online media from different geographical locations, the company needs to increase distribution centers to reach every customer. The company can achieve this result by partnering with local suppliers worldwide to produce products that match the new customer demand. Partnering will enable Inditex to diversify its products and create a culture that fits the host country or region’s cultural needs.
Inditex can focus on minimizing transporting time as it is a major bottleneck for companies during the covid-19. To achieve this, Inditex can partner with other distribution companies that face minimal movement restrictions to deal with the transportation of products to its retail stores.
Finally, horizontal integration allows the company to grow in size and increase market power. Outsourcing will enable Inditex to concentrate on more minor roles in the supply chain, maximizing resource use, which is essential due to physical interaction restrictions. The restrictions made it necessary to reduce employees hence justifying the need to integrate business effectively horizontally.
The shift from vertical to horizontal will be challenging initially, but as they will spend time finding new partners and resources to adapt their infrastructure, it will pay off in the long run.
Outsourcing supply has essential benefits in the increasingly competitive apparel industry, such as increasing market share by diversifying products, reducing competition, and improving product quality. More companies share ideas and resources for the common benefit. The method also leverages on the unexplored markets that the pandemic has created and fewer production costs.
Conclusion
Both horizontal and vertical integration offers significant benefits and drawbacks to huge companies. However, due to the unpredictable effects of the covid-19 pandemic, horizontal integration represents the best alternative for companies navigating the disruptions caused. The overwhelming benefits of sharing production and logistics costs leverages the dynamic customer demand. Outsourcing offers flexibility in its operations for large companies, and this allows them to dominate the market. The pandemic challenged Inditex’s good visibility due to its vertical approach; therefore, altering a portion of Inditex’s operations to horizontal integration will provide vital interventions for Inditex. Inditex takes pride in its customer-centric approach that uses highly centralized vertical integration; however, in the covid-19 environment, horizontal integration is the best approach to leverage the fashion market.
Bibliography
Aftab, M.A., Yuanjian, Q., Kabir, N. and Barua, Z., 2018. Super responsive supply chain: The case of Spanish fast-fashion retailer Inditex-Zara. International Journal of Business and Management, 13(5), p.212.
Popescu, A.C., 2015. Fast Fashion and sustainable supply chain management. Revista tinerilor economişti, (24), pp.29-40.
POPESCU, L.P.A.C., 2015. ON THE SUSTAINABILITY OF FAST FASHION SUPPLY CHAINS–A COMPARISON BETWEEN THE SUSTAINABILITY OF INDITEX AND H&M’S SUPPLY CHAINS. Revista Tinerilor Economisti (The Young Economists Journal), 1(24), pp.29-40.
Sarkis, J., 2020. Supply chain sustainability: learning from the COVID-19 pandemic. International Journal of Operations & Production Management.
Schewe, K.D., Geist, V., Illibauer, C., Kossak, F., Natschläger-Carpella, C., Kopetzky, T., Kubovy, J., Freudenthaler, B. and Ziebermayr, T., 2015. Horizontal business process model integration. In Transactions on Large-Scale Data-and Knowledge-Centered Systems XVIII (pp. 30-52). Springer, Berlin, Heidelberg.
Sen, S., Antara, N., Sen, S., and Chowdhury, S., 2020. The apparel workers are at the highest vulnerability due to COVID-19: a study on the Bangladesh Apparel Industry. Sen S, Antara N, Sen S, Chowdhury S. The apparel workers are in the highest vulnerability due to COVID-19: a study on the Bangladesh Apparel Industry. Asia Pacific J Multidiscip Res, 8(3).
Youn, S.Y., Lee, J.E. and Ha-Brookshire, J., 2021. Fashion Consumers’ Channel Switching Behavior During the COVID-19: Protection Motivation Theory in the Extended Planned Behavior Framework. Clothing and Textiles Research Journal, 39(2), pp.139-156.
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