In a competitive environment, many businesses search in earnest for anything that can offer them a strategic edge. In these situations, their eyes often turn to their supply chains. Some organizations consider optimizing what they already have. Others, look further afield to ask how supply chain integration strategies can help them gain a stronger foothold in their niche.
In this article, we’ll take a closer look at the concept of supply chain integration. What is it? And how can your business leverage supply chain integration to get an edge in your marketplace?
We’ll start by setting the groundwork with a few definitions.
What Is Supply Chain Integration?
Supply chain management and optimization focus on creating efficiencies within an existing supply chain. In contrast, supply chain integration aims to bring the links in the supply chain closer together. It focuses on creating greater collaboration between links—either by uniting them under shared goals, bringing more links under the same leadership, and/or integrating data between links to create additional transparency.
The National Research Council defines supply chain integration as follows:
An integrated supply chain can be defined as an association of customers and suppliers who work together to optimize their collective performance in the creation, distribution, and support of an end product.
The objective of integration is to focus and coordinate the relevant resources of each participant on the needs of the supply chain and to optimize the overall performance of the chain.
There are a number of ways an organization can approach integration. Let’s examine a few strategies, along with some examples.
Supply Chain Integration Strategies
Internal Integration vs. External Integration
First and foremost, companies can look both internally and externally for opportunities to integrate their supply chains.
- Internally: Perhaps different departments or different locations are managing their own individual supply chains. This can create some obvious inefficiencies. It can also mean missed opportunities to negotiate more effectively with suppliers, carriers, and other links in the chain. As a result, companies may look to integrate their internal supply chains so they all work in concert together, rather than operating in individual silos.
- Externally: Companies can also look outward to integrate their supply chains more effectively, sometimes through strategic partnerships or acquisition. This can come in the form of vertical or horizontal integration, which we’ll discuss next.
Horizontal Integration vs. Vertical Integration
Vertical integration was once the norm for manufacturing. Under this philosophy, an operation controlled a majority of its supply chains by creating all the necessary components in house and assembling them to create a finished product. In some cases, these organizations even controlled the sales and distribution of their final products.
Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. (Source: Investopedia)
While vertical integration holds some appeal, some companies moved toward a different model, one in which they focused on their core competency and outsourced the rest. As one example of this model, a manufacturer might not fabricate any of the components that make up its product. Instead, it may rely entirely on outside suppliers for components, which it purchases and assembles to create a finished product.
While both models have their supporters, vertical integration can give organizations a significant edge, as you’ll see in the following examples.
One of the more famous models of vertical integration comes from steel magnate Andrew Carnegie. He acquired raw materials (iron mines) and transportation assets (railroads) that gave him greater control of the steel-making and distribution process, allowing him to cut his costs, increase his margins, and outpace his competitors.
Amazon’s evolution has offered another example of vertical integration. When Amazon was starting out as an online retailer for books, founder Jeff Bezos had to make a decision: be a middleman between publishers and consumers or build warehouses and acquire stock of his own. If he hadn’t chosen the latter, the Amazon customer experience of today—including two-day Prime Shipping—wouldn’t exist, since Amazon simply wouldn’t have the authority and autonomy to pull it off.
Amazon’s delivery fleet and its recent foray into air cargo is another example of vertical integration. By creating its own carrier network, Amazon has decreased its reliance on the USPS, UPS, and FedEx, allowing it to set its own delivery standards and costs.
Vertical integration doesn’t always have to come through acquisition or complete ownership. Procter & Gamble formed a strategic partnership with Walmart to deliver an exclusive product line to the retailer. They also integrated their back-end systems to create seamless inventory monitoring, fulfillment, and delivery. While it might not fit some textbook definitions of vertical integration, this venture still represented a tightening of two links in supply chain, one that resulted in higher revenue for both parties.
Horizontal integration, in contrast, often focuses on buying up competitors, rather than links in the supply chain. For example, in addition to his vertical integration strategy, Carnegie also employed a horizontal integration strategy by purchasing other steel manufacturers. Disney’s acquisition of Pixar falls into this category, as does the 2015 merger of Heinz and Kraft Foods.
What lies ahead for companies who pursue these integration strategies? We’ll investigate that topic next.
What Kind of Benefits Can Supply Chain Integration Offer?
Both horizontal and vertical integration can offer significant advantages to organizations who pursue these strategies.
Horizontal Integration Benefits
- A horizontal integration through acquisition, like the Heinz and Kraft Foods merger, can increase a company’s buying power. Heinz and Kraft, for example, might have been able to negotiate a lower cost for the plastic bottles that hold their condiments. They may also have been able to secure a more significant volume discount for their freight, lowering transportation costs.
- Horizontal integration might also create a stronger market position, which might offer more leverage with retail partners, resulting in advantages like more prominent shelf space.
Vertical Integration Benefits
- Vertical integration might allow a company to exert more control over its costs. For example, if a manufacturer acquires the supplier of a key component, they may be able to optimize the supplier’s operations and lower overall manufacturing expenses.
- Vertical integration could also mean getting products in the hands of consumers faster. Overseeing more of the links of your supply chain might create more effective coordination that reduces lag time between links.
- Vertical integration can also mean the ability to more nimbly respond to changes in consumer demand, since your organization has greater influence across more links of the supply chain.
Finally, since supply chain integration often means managing different links of the supply chain within the same system, both horizontal and vertical integration can create greater data transparency, deliverying key metrics to stakeholders for more effective decision-making.
Opportunities for Integration Within Your Organization
If you’ve been looking for ways to get ahead of your competition, these supply chain integration strategies might offer you some good food for thought. Whether it comes vertically, horizontally, or even internally, supply chain integration can offer you the opportunity to increase efficiencies, lower costs, capture a larger market share, and boost your bottom line.
Want to talk more about leveraging your supply chain to create a competitive advantage this year? Talk with one of our experts! Reach out for a complimentary consultation to discover more.
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