Vertical Integration
Vertical integration is a supply chain management strategy whereby a company produces or acquires additional business units that are involved in the same or similar value-adding activities as the parent company. The goal of vertical integration is usually to:
- increase efficiencies,
- reduce costs,
- and improve quality control throughout the supply chain.
In some cases, vertical integration can also help a company to better control its market share.
There are two main types of vertical integration:
- Backward integration occurs when a company acquires business units that are involved in activities earlier on in the supply chain, such as raw material production or component manufacturing.
- Forward integration occurs when a company acquires business units that are involved in activities later on in the supply chain, such as distribution and sales to final customers.
While there are advantages to vertical integration in some cases, it can also have downsides as well. For example, if a company acquires too many business units that are involved in the same or similar activities, this can lead to duplication of resources and inflexibility within the supply chain. Additionally, companies need to be wary of vertical integration strategies that place them at risk of becoming monopolies or oligopolies within their markets.
Despite these potential downsides, there are many benefits associated with vertical integration in logistics:
- For example, having direct control over important aspects of production and distribution can enable a company to respond more quickly and effectively to changing market dynamics and customer needs.
- Additionally, vertical integration can lead to economies of scale and scope that can result in significant cost savings. In some cases, companies may also be able to achieve better quality control by vertically integrating their supply chains.
Overall, vertical integration is a complex supply chain management strategy with both advantages and disadvantages. Companies need to carefully consider their unique needs and objectives before deciding whether or not to pursue a vertical integration strategy.
Related Links
Vertical integration
Vertical Integration
Vertical Integration: Definition, Examples, Pros, Cons
When and when not to vertically integrate – McKinsey
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