Integration of Supply Chain Management: Horizontal and Vertical

Integration of Supply Chain Management

Which is your favorite soft drink? Is it soda or fruit juice? Probably your trolley looks incomplete when you go shopping and haven’t picked it up. As they stand neatly arranged on the shelf, have you ever wondered how they reached the store? Well, behind the scenes is an intricate system that ensures goods reach consumers. It’s the supply chain. The main purpose of this process is to ensure goods and services flow smoothly from the collection of raw materials to the final products. Due to the critical role this department plays, proper management is necessary if the business is to succeed.

A supply chain manager is at the helm of the process. What does he do? He ensures that raw materials are acquired, production is ongoing with minimum hitches and goods have reached the market. Efficiency in these operations reduces costs and increases customer satisfaction in terms of quality and speedy deliveries. Business owners can enjoy these desirable results by keeping track of inventories. Additionally, distribution and sales have to be thoroughly accounted for.

Improvements in business operations move companies to a whole new level. They contribute to the thriving of the establishment amid intense competition in the market. An expansion could make them reach their goals and push the bar higher. How might this be achieved? By use of an integrated supply chain management. It occurs in two categories: horizontal and vertical integration. Both approaches have proved beneficial as seen in some renowned companies. What are these strategies and how do they affect businesses? This article gives detailed information on the subject.   

Horizontal integration

Have you ever heard of two big companies merging to operate as one? That’s horizontal integration. The main objective is for a company to assimilate another in the same line of work. Its done to increase customer base, boosting production, pooling of talents, reducing high competition, and venturing into a new market.  A good example is when Walt Disney and 21^st Century Fox formed one powerful film making company.

Advantages

Reduced cost of production

When the businesses were independent, the financial burden was solely borne by the owners. They had to purchase necessary equipment, settle bills and ensure products arrive in the market in good time. However, a merger lightens the load for both parties. For example, if company ‘ A’ lacked the latest technology in production, manufacturing is improved after joining company ‘B’ since they possess the machine.

Additionally, marketing and research become a shared responsibility for both. If such costs were to be shouldered by one having inadequate funds, it would be overwhelming.

More profits

The combination of companies leads to the diversification of goods and services. The varieties offered undoubtedly increase gains. The accountant could well be recording new peak sales.

Expansion of consumer base

When the acquisition of another company occurs, customers increase. Both sides had their loyal therefore they are pooled together after the merger. Also, unreachable markets now become accessible. It leads to the development of the business.

Quality labor

Employees are essential in any production process. From the technicians to IT experts, all work harmoniously for success in the final product. When experienced workers combine and work as a team, there are fewer disruptions at the workplace.

Disadvantages

Monopoly

After horizontal integration, the business often takes a larger share in the market. With fewer competitors, the dominant producer leads as others follow. Consumers have reduced options.

Increased prices

With the merger, the company expands and becomes among the best. Some take advantage and extort customers with the high pricing of their goods and services.

Government interference

Officials have to regularly examine the horizontal mergers to ensure that their business operations are per the law.

Challenges during culture change

When new members are on board, adjusting to the environment maybe difficult for employees.

 

Vertical integration

It occurs when a company gains the acquisition of an industry player who is on a different stage of the production process. Similar to horizontal integration, the plan seeks to increase sales. Also, the business aims at lowering the cost of production and improving its role in the supply chain. Vertical integration is in two forms; forward and backward integration.

If a company purchases a business that’s on the next stage of production, this can be referred to as forwarding integration. If the acquired business is at a prior production level, then it’s backward integration.

Advantages

Increased profits

When the company has ventured into another stage of production, more income is received. For example, Netflix earned more when it ventured into content creation. Initially, filmmakers were charged for having their movies shown on this platform. But in recent years, they have boosted their gains by producing their own.

Quality control

Once the company is also handling another production level, the quality of the final product is enhanced. For example, the owner of a chain of bakeries could venture into sales of the ingredients. This not only increases his revenue but also enables him to select the best baking products.

Disadvantages

High cost

Vertical integration might be costly due to the large amounts of capital required. Gaining control over an established business means purchasing it at the estimated worth since it will operate under you. Ownership rights are usually expensive.

The bottom line

Any company that wants to be the pace-setter in the industry keeps on improving its strategies. A specific area of concern is supply chain management. This process ensures things are in order from sourcing of materials to their arrival in the market. Companies can opt for horizontal or vertical integration. Both involve merging with another company in order to increase profits, lower the production cost and increase consumers. However, these moves also have their cons. The company becomes dominant and charge more for their products. Also, acquiring the other business might be costly, therefore leading to debt.

Are you a business person wanting your company to develop? Integrated supply chain management might be the way to move up the ladder. Carefully weigh between the two options and choose which course of action will enable you to attain your goal. Whatever your endeavor, may it bear fruit!