Business Week had an article about Zara, the Spanish apparel retailer, a few weeks ago. I actually just taught a case study about Zara, as I often do in my MBA strategy course. It's a fascinating company. While many clothing retailers outsource all production to low wage nations, particularly in Asia, Zara actually produces a substantial percentage of their clothes in their own factories in Europe.
Their vertical integration strategy is designed to enable them to react very quickly to market trends, and to produce fashionable clothes very quickly as part of their "fast fashion follower" strategy. The fast replenishment model and massive flexibility means Zara makes fewer mistakes, and when they do make a fashion error, it is less costly becuase they haven't ordered a huge shipment of the item from Asia. Because of this, they have fewer markdowns, and their markdowns tend to be smaller. That helps create higher operating margins.
Vertical integration always has its risks, but in this case, Zara has found a way to make it very profitable. It also has helped to create a unique business model that is very hard to imitate.