Every entrepreneur’s dream is to reduce business costs while controlling the quality of products and services they are offering to their customers. They do this by integrating and being in charge of different stages of their business.
Through this approach, they have the power to determine the quality of raw materials, production standards, storage, and distribution of the finished goods. Also, they gain a competitive advantage since they control all activities taking place in their venture. One approach the entrepreneurs use is the vertically integrated supply chain.
So, what is it, and how does it work? Keep reading to learn more.
What is the Vertically Integrated Supply Chain business model?
The vertically integrated supply chain is a business model where the company takes charge of its production and distribution processes instead of outsourcing these tasks. This means that the company sources the raw materials, processes, and delivers the products to the users without using third parties.
A business can achieve this goal by directly owning various production and distribution channels. This aspect can occur through direct investing in the establishment of suppliers, production and manufacturing factories, warehouses, and distribution facilities, or acquiring external companies involved in their supply chain. In other words, the company control and own the entire supply chain.
How does it work?
The main goal of the vertically integrated supply chain is to reduce business costs and control the quality of products offered. This goal is achievable if the company can control the quality of the raw materials used in the production processes. Also, it must set the production standards in the manufacturing factories and control the storage and distribution channels.
For this to happen, company management must make all decisions. This aspect would be impossible if the company does not own the supply chain fully. It is hard to make decisions when relying on outsourcing to run your supply chain and distribution processes.
To gain control, a company can follow one of the two approaches: forward and backward integration. Forward integration is where the company takes charge of the distribution and sales processes. This means that it is responsible for taking its finished products to the customers’ doorsteps. The company runs its stores and sells the finished products to the customers directly rather than through third parties.
On the other hand, backward integration seeks to control the production process. It focuses on determining the quality of the finished products by taking charge of the raw material sourcing by establishing and owning suppliers. Hence, the company owns the production process and the source of raw materials, which guarantee quality final products.
Examples of Vertically integrated supply chain business model
Vertically integrated supply chain business model is one of the oldest approaches. For this reason, many companies have been using it.
A good example of these companies is ExxonMobil which operates in the fossil fuel industry. The company has an exploration arm responsible for searching for new oil sources. Also, it has refining divisions, logistics, and retail points. The company owns and controls these processes.
Netflix is another excellent example of a company using this approach. The company started selling DVDs from other producers. With time, it established its own studios and started to produce movies and films. The company runs a platform where target consumers can access the movies directly from Netflix. Hence, it controls all the movie production and delivery process.
Other companies using this model are footwear and apparel manufacturers, Google, Amazon, Target, and others.
Pros and Cons of the Vertically integrated supply chain business model
Vertically integrated supply chain business model is a powerful strategy that can help a company gain a competitive advantage. By using it, you control every aspect of your business. However, like other models, it has its benefits and shortfalls. Here are some of its pros and cons:
Pros
Enhances efficiency in the business processes
Cost is a major challenge for many businesses. With increased costs, businesses seek ways to lower costs and enhance efficiency. By adopting this model, companies can control the entire business process from material sourcing to delivering products to the consumers.
Taking control helps your business control costs as it eliminates the outsourcing and distribution expenses going to the players in this process.
Strengthens the company’s competitive advantage
Being ahead of your competitors is the desire of every entrepreneur. It feels good when you stand out as the pacesetter in your niche. However, gaining a competitive edge is not always an easy aspect.
Using the vertically integrated supply chain business model helps you get a competitive advantage. Your business has the power to determine the quality of materials, products, and the level of the customer experience offered. So, you will have a stronger relationship with your customers than your competitors.
Boost the business profits
The main goal of running a business is to remain profitable. By controlling the entire supply chain, you eliminate and reduce costs. By lowering costs, you boost your profitability and pass the same to the customers by offering them lower prices.
Eliminates the disruptions in the supply chain
One of the challenges companies face is the disruption of their supply chains. Sometimes, the suppliers may delay in delivering raw materials. This aspect affects all other processes and can affect the performance of your business.
With vertically integrated supply chain, you eliminate such disruptions as you are in charge of the whole supply chain. This ensures the seamless flow of all the business processes, which enhances the reliability and credibility of your brand.
Cons
Require high initial investment
While this model is effective, it can be a challenge for many businesses. The model requires huge investment, which many companies cannot afford.
It fails to benefit from supply chain experts
By centralizing the control of your supply chain processes, your business misses the benefit of experts. Outsourcing helps you access experts in each area freely or at lower costs. This is impossible when you use the vertically integrated supply chain model.
Conclusion
In a word, the vertically integrated supply chain is a powerful business model. Using this model can enhance your competitiveness in your niche. The model helps you lower costs and improve efficiency. However, it requires huge capital investment. Nonetheless, it is a perfect idea.
