International Business – Outsourcing or Reshoring?
Companies outsource their key processes to third parties for many years, but, perhaps, at the turn of the 21st century, the term “outsourcing” began to gain momentum. Around this time, the companies began to engage third parties to perform the work in other countries – a process known as offshoring – in large emerging markets. The process of offshoring has attracted political and public attention because of concerns that it is destructive to the internal labor market. In this regard, a process of reshoring (the return of production from abroad), but such factors as cost and efficiency of business process outsourcing remain significant (Oshri, 2009).
The paper is required to identify a value chain activity suitable for outsourcing to or re-shoring from an emerging economy. So, the idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing (or service) business as a structure, consisted of subsystems every with contributions, alteration processes and productions. Contributions, alteration processes and productions occupy the achievement and utilization of resources – cash, work, supplies, apparatus, buildings, ground, management and organization (Thompson and Strickland, 2003). The way how value chain activities are carried out determines costs and affects profits. For the completion of this assignment Inditex Company, one of the world’s largest apparel manufacturers, was chosen as the great example of unique production and supply chain.
Inditex (Industrias de Diseño Textil Sociedad Anónima) Company is a Spanish multinational company. It is engaged in the design, manufacture and sale of clothing, footwear, accessories, textiles and decorative items for the home. It is the owner of chain stores of eight formats: Zara –women’s, men’s and children’s clothing, Pull & Bear –youth clothing, Massimo Dutti – urban, classic clothing, Bershka – teen clothing, Stradivarius – female youth clothing, Oysho – clothes for the house, ZaraHome– textiles and home furnishings, and Uterque– women’s clothing and accessories (Bilal, 2014).
Based on the PEST, the following factors, which impact on Inditex, can be considered:
Political factors (JustLanded, 2014):
- The foreign policy of modern Spain is influenced by factors that are derived from its membership in the EU, NATO and other international organizations, as well as the traditional ties with the countries of the Mediterranean and the Middle East, and in view of the bilateral political cooperation with the United States.
- The tax system in Spain is one of the youngest in Europe. Its enterprise activity tax is 25% spread on all types of institutions, regardless of the form or name, if they have the status of a legal entity, with the exception of civil societies.
- Operating under globalization circumstances, the company faces high protection of markets of these countries’ circumstances.
Economic factors (Trading Economics, 2014):
- GDP growth rate is recorded at the level of 0.5% in Q3 2014.
- Inflation rate is -0.4% in November 2014.
- Unemployment rate reached 23.67% in Q3 2014.
- In currency market the revaluation is observed: EUR1 = USD1.22 in December from USD1.24 in November.
- However, Spain is a potential bankruptcy, which could push the whole Europe into another pit of the financial crisis with all its consequences.
- Insufficient number of multinational corporations, and thus the dependence of Spain on external conditions.
- Urbanization pushes forward whole sectors of economy. The concentration of production and capital leads to higher “cost of living” in large metropolitan areas.
- The world’s population is growing rapidly, but the world product grows faster and shows the ability of the world to develop the productive forces of society. Population growth will not be a problem if the economic and social changes are implemented quickly enough and there is necessary technical progress. Population growth in Spain is 53% over the last 50 years.
- Acceleration of consumption is caused by the fact that the time is going very fast both from social and economic perspectives.
- Social media interactivity is another megatrend of the modern world (in addition to Internet in general). The information is delivered very quickly; thus, testimonials about different goods are spread in seconds, increasing or decreasing customers’ attention.
- The current state of R&D in the country remains poor (proportion of R&D expenditure in GDP amounted to 1.35% in 2012).
- An important indicator of the development of research and innovation sector in Spain is the share of high-tech products in manufactured exports.
- Backlog of Spain in the field of innovation of Spanish companies is due to the structure of its economy, which is dominated by small and medium enterprises.
The company combines ca. 6,500 stores in more than 4,000 cities in 84 countries. The Corporation is a global leader in retail apparel over other hundreds of companies. Amancio Ortega is the founder and the largest shareholder. The company was founded in 1985, but the history of the company goes back almost 50 years. Inditex’s headquarters is located in Arteixo, Spain. Today the company has over 120,000 employees worldwide. Women comprise the majority of the company’s employees, and the average age of employees is 26 (Inditex, 2014). Inditex’s range is classified as life-style – clothes for all occasions, of different styles for men and women, mostly aged 25 to 35 years. Inditex’s strategy is that it offers the high quality of fashion clothes at affordable prices. Inditex focuses mainly on market development strategy (Inditex, 2014). Development strategies of the company are the following:
1. Leadership Strategy at the lowest price formed on the basis of a unique and efficient production.
2. Innovative strategy for regular assortment updates; being ahead of competitors; leadership based on a unique supply of goods (fast fashion).
3. Strategy of vertical integration (integration up and down). The company itself develops, manufactures and sells a product.
Since opening its first Zara store, Inditex Corporation continues to conquer the world. It opens annually 500-600 stores in various parts of the world, from Kazakhstan to Bolivia, using previously rejected franchising model. Inditex is franchise company: Andorra, Saudi Arabia, Bahrain, Cyprus, Colombia, Costa Rica, United Arab Emirates, Slovenia, Finland, Guatemala, Iceland, Honduras, Israel, Jordan, Kuwait, Lebanon, Malaysia, Malta, Morocco, Panama, Qatar, Dominican Republic, El Salvador, Venezuela. Today Inditex remains closely connected to Europe, where there are 80% of its stores. There are shops in Latin America and Turkey, Cyprus, Canada, USA, Japan and the Middle East. Inditex yet cannot win the most receptive markets of the world – North America and Japan. According to experts, the problem is that U.S. companies working in the same inexpensive niche of fashionable clothes (e.g. GAP) have a very strong position in the U.S. and Japanese markets. However, if you look at how quickly and effectively the European market is being captured, it becomes clear that Americans will have to work more in the future (Inditex, 2014).
Major competitors of Inditex are Benetton (Benetton Group SpA, Italian company), Marks & Spencer (English company), H&M (Hennes & Mauritz, Sweden company) and GAP (American company).
Key Value Adding Activities
Inditex, which capitalization exceeded EUR 65 billion, honed its strategy over thirty years, breaking almost all the rules of retail during this time (Forbes, 2014). The secret of success lies on the surface: Ortega improved production and sale of clothing for the mass market and made it a little more fashionable. Yet this is only the tip of the iceberg. The company strongly holds one ach link of the distribution chain. This allows achieving a phenomenal speed in new product development: the time between the moment when the designer draws a sketch of the future garment and the moment when the item is ready to be on the store shelves is onlytwo weeks.
However, Inditex works hard on improving its production and procurement areas, trying to keep costs as low as possible. The concept of fast fashion initially met only criticism but eventually turned into a role model: its elements were borrowed by popular in the U.S. Los Angeles-based chain Forever 21, the Spanish chain Mango and the British Topshop.
Inditex should concentrate its efforts on the competitive advantage expressed in a low price and instant renewability of collections. Population growth and urbanization will only provide the company with additional customers if appropriate marketing campaign is used. Increased competition will not allow the company to be the last in chain. New collections will be required all the time. The company is recommended to take part asa sponsor in some popular events like TV shows, conferences, workshops, etc. Social media is one of the main tolls today, so the company should be registered in different social networks and be followed by as many customers as possible. So the cooperation with social media will bring additional profits. Inditex is recommended to launch a mobile application, which will help to choose apparel based on entered data.
Outsource or Reshore: Reasons
Unlike many suppliers of clothing, actively using outsourcing, Inditex produces almost half of its production on their own. The company strives to not increase production volumes and deliberately keeps spare capacity. Furthermore, Inditex does not pursue economies of scale: products are manufactured and distributed in small batches. Without relying on external partners, the company itself is engaged in design, warehousing, distribution and logistics.
The result was the adapted to the business model of Inditex the supply chain, capable of scratchpad reaction. In order to present the new model of clothing, including design, production and delivery to stores, the company takes only 15 days. So, in Inditex stores the customer always finds novelty, but in limited quantities (Bridges Consulting, 2013).
Organization of the supply chain of Inditex allows representatives of outlets to quickly and easily transfer designers and manufacturers both the systemic nature of the information and data on a single fact. The system includes means for monitoring in real time of materials and products at all stages of production and sale. The purpose of this scheme is as quickly as possible and directly to close the information cycle that combines the end user with a “bottom-up” chain links, i.e. those who engaged in the design, procurement, manufacturing and distribution.
Taxation, IT and personnel administration are the most popular features that currently business leaders outsource to improve efficiency and reduce costs. The results also show that many of the leaders of medium-sized businesses are cautious in this regard. Some of them had a bad previous experience, but mostly, they just do not want to lose control of the key processes and consider the organization process of outsourcing costly. However, many companies are willing to reconsider their position if they would need to reduce costs, improve efficiency and increase significantly the scope of work (Contractor, Kumar, Kundu and Pedersen, 2010).
When entering a foreign market, there are factors of national economies. With too aggressive regional expansion Inditex inevitably encounters problems with logistics and personnel. Also the cost of imported goods increases due to the customs rate. Therefore, for the company it is quite effective to outsource. Inditex has a high level of centralization. Multi-brand stores of the company serve as points of sale and as collection center in different countries and for the head office respectively. Information about local markets and consumer preferences are provided to specialists and is redirected to Spain, where decisions on collection design or pricing policies are made. It should be noted that product range is made largely on the basis of local applications and may differ in the two neighboring stores by 40-50%.
Ways of Implementation
Inditex strategy is generally dissimilar with all accepted laws of business – no interviews, public speeches or published ads. Even Jesús Salgado, the author of the book “From zero to Zara”, devoted to Amancio Ortega, the textile magnate,has been looking for an opportunity to meet Ortego for a few years. The patience of Salgado was rewarded: today it is believed that he was the only one to uncover the world of enigmatic personality of Spain tailor. Inditex will benefit if it launches a campaign in social media and uses funds for charity, helping orphans all over the world (Anja Anastasja Keller, 2012).
Inditex can focus, for example, on such product area as accessories. Today in the world of fashion accessories have come to occupy a special position. This is not just a piece of jewelry but the main attribute of clothing and style, which is able to create a unique and original way not only for women but also for men. Visual integrity depends on not only stylish shoes and trousers, but also original accessories designed to complement the shape so that it has found a finished look.
It has built a high vertical integration of the value chain, and to quickly follow it, it was decided to concentrate management, production and distribution primarily in Spain. The average duration of the entire cycle in this company is about 15 days, including: creation of a new design – 5 days; production – 8 days; and delivery of products – the average time a client, that is, delivery of goods from its own logistics centers in the retail trade, is one to two days. A subsequent sale is hold for three days (target). For the company the time spent for the whole cycle is more important than individual performance. In comparison with other successful companies of this industry (H&M), this figure is much lower – 28 days. This approach leads to low reserves, absence of unsold goods and the ability to avoid price wars. Customers get exactly what they want at the moment, and their satisfaction with the product is respectively high. Information about new trends in the company can be taken from various channels – fashion shows, feedback from affiliates, market researches, etc. It can be immediately used for new models. The goal is that each time the client visits the store he sees new fashion collections in small quantities. The collection is updated very often; affiliates receive products twice a week. Another advantage of high customer traffic is spending much less money on advertising.
The fundamental aspect of the business is the company’s model – the geography of production. As a rule, all brands of inexpensive clothing are produced in factories in the third world countries by taking advantage of cheap labor. Two-thirds of Inditex products are manufactured in Spain, Portugal and Morocco – especially when it comes to expensive and fashionable garments of specific style. Simple, basic things are purchased from factories in Eastern Europe, Africa and Asia. The Corporation does not skimp on the skills and salaries and relies on the local labor market in Spain. Its own factories allow to win as regards time frames and not to overpay for shipping goods to Europe.
It has built a high vertical integration of the value chain, and to quickly follow it, it was decided to concentrate management, production and distribution primarily in Spain. The average duration of the entire cycle in this company is about 15 days, including:
- creation of a new design – 5 days;
- production – 8 days; and
- delivery of products – the average time a client, that is, delivery of goods from its own logistics centers in the retail trade, is one to two days.
A subsequent sale is hold for three days (target). For the company the time spent for the whole cycle is more important than individual performance. In comparison with other successful companies of this industry (H&M), this figure is much longer – 28 days. This approach leads to low reserves, absence of unsold goods and the ability to avoid price wars. Customers get exactly what they want at the moment, and their satisfaction with the product is respectively high. Information about new trends in the company can be taken from various channels – fashion shows, feedback from affiliates, market researches, etc. It can be immediately used for new models. The goal is that each time the client visits the store he sees new fashion collections in small quantities. The collection is updated very often; affiliates receive products twice a week. Another advantage of high customer traffic is spending much less money on advertising.
Inditex Group should use the following opportunities of countries to modify its system: population growth and urbanization will allow the company to attract new customers by existing products; customs, traditions and manners, as well as social institutions, business customs, lifestyle choices, core values, norms, attitudes relating to foreign and domestic products will motivate the company to conduct regional segmentation. As the role of transport is great, Inditex should strive to improve its logistics system.
In order to develop the company and achieve the vision, it is recommended to make deeper market penetration. Market penetration strategy may be based on information describing the mission of the company, basic properties of the product and the benefits it brings to customers, production technology, providing high quality and reliable product while performing its inherent functions. There are opportunities for the implementation of this strategy, as part of the product range is on the stage of the life cycle when it is possible to increase sales without entering new markets. This will allow transferring groups of goods into the following segments of BCG matrix. In addition, this strategy has the lowest costs that might be important while building BCG matrix later in the context of gross profit.
With quite destructive regional development Inditex unavoidably faces problems with logistics and personnel. Also the cost of imported goods increases due to the customs rate. Therefore, for the company it is quite effective to outsource. Information about local markets and consumer preferences are provided to specialists and is redirected to Spain, where decisions on collection design or pricing policies are made.
The portfolio will have the greatest possible share of the market space if the company sets the minimum price, then reduces production costs and gradually lowers the price more. It is assumed that the take-over of a large share of the market will allow the company to control the market to some extent, creating the necessary framework to promote the product and opposing the emergence of competitors.
The company can outsource China or India, as well as other one-dollar countries (like Vietnam), where there is cheap labor force and low standards of living.
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