Manufacturers are constantly under pressure to reduce costs while maintaining excellent quality. To achieve these objectives, companies are strategically integrating along the supply chain. There are two types of integrated supply chain models: horizontal and vertical. Horizontal integration is the acquisition of competitors in order to expand control at a given point in the supply chain. For example, one manufacturer acquires another manufacturer for growth opportunities at the manufacturing stage of the supply chain.
Vertical integration is the acquisition of additional processes to broaden control along the supply chain. While both of these supply chain models offer benefits to manufacturers such as cost savings and growth opportunities, the focus of the remainder of this article is on vertical integration and the benefits of partnering with a vertically integrated supplier.
What is a Vertically Integrated Supplier?
Optimization of the supply chain is a challenge for every company. A company’s supply chain starts with raw material acquisition and ends when the customer receives the final product – and is comprised of all of the suppliers that participate in the sourcing, manufacturing, assembly, and distribution processes. Vertical integration occurs when a company acquires additional stages of the supply chain. For example, instead of solely manufacturing products, a company broadens its offerings to also operate as a distributor. The key concept is that vertically integrated suppliers control more steps in their supply chain!
What is Forward and Backward Integration?
There are two kinds of vertical integration: forward and backward. As the name suggests, forward integration, or downstream integration as it is often called, is when a company vertically integrates “forward” along the supply chain. An example of forward integration is if a manufacturing company that has historically outsourced distribution activities establishes a distribution network in order to manage distribution of its goods – the company is demonstrating forward integration. Alternatively, backward integration, or upstream integration, occurs when companies expand “backward” along the supply chain. As example of backward integration is when a manufacturer broadens its business offerings to include the acquisition of raw materials. In both forward and backward integration, the company reduces the number of suppliers and gains control of additional stages of the supply chain.
Benefits of Vertical Integration
As markets become increasingly competitive, vertical integration becomes more of a necessity for manufacturers. By acquiring additional stages in the supply chain, companies increase control, leading to lower risks, higher efficiency, and lower costs – all of which provide a critical competitive edge! Below are some of the advantages of a vertically integrated business model. It should be noted that vertical integration benefits both the manufacturer as well as the customer. Partnering with a vertically integrated supplier, like Desin, allows the lower risks and cost savings to be passed onto the customer – a win for both parties!
- Lower Costs: decreased expenses are the key benefit of vertical integration. The cost savings comes from a variety of sources depending on how a company integrates along its supply chain, but can include lower transportation and logistics expenses, elimination of markup fees from suppliers or wholesalers, and lower labor costs to oversee and operate the supply chain internally compared to outsourcing activities to a third party. Additionally, vertically integrated suppliers are no longer dependent on other vendors to dictate terms and pricing – resulting in less time spent on contract negotiations and additional cost benefits.
- Fewer Disruptions: simply put, the more stages of the supply chain that are controlled, the fewer disruptions and delays that occur. Vertically integrated manufacturers control more of their supply chain and have less surprises – and are able to more effectively manage any problems that arise. Additionally, the supply chain process flows more smoothly for integrated manufacturers – getting products to customers more rapidly and reducing time to market.
- More Flexibility: vertical integration allows manufacturers to be more nimble and responsive to changing market conditions and customer demands. Their distribution networks are in place to seamlessly move goods as necessary. Integration also provides an economy of scale that is not possible for non-integrated suppliers. Manufacturers are able to use their size for negotiating power and to buy in bulk – resulting in lower per unit costs.
- Improved Customer Satisfaction: by controlling their own destiny, vertically integrated suppliers have happier customers! Instead of relying on suppliers, integrated manufacturers directly influence the customer experience throughout the supply chain. Vertically integrated suppliers also pass cost savings on to the customer, allowing for more competitive pricing strategies and more satisfied customers. Lastly, integration allows manufacturers to even more closely track and control quality – resulting in fewer off-spec or returned products and a better overall customer experience.
Desin – Vertically Integrated Manufacturing
Desin is a world class manufacturer of Medical Devices, Industrial devices, Human Machine Interface (HMI), Sensors, Wearables and IOT products that meet the highest quality standards. We specialize in the development of technology and applications with global reach, which allow us to offer low-cost solutions at global quality performance.
Desin International provides complete design and manufacturing solutions for medical, and industrial devices and sensors. Unlike other companies, our vertical integration allows us to manufacture each of the components that integrate a complete device. We offer a turnkey solution at the lowest cost. After analyzing your objectives and requirements, we evaluate all the different options and give you the best possible solution for your project.