Vertical Vs Horizontal Integration

Shift from Vertical to Lateral (Horizontal) Supply Chain Management

  • Vertical integration, or vertical supply chain management, refers to the practice of bringing the supply chain inside one organization.
  • It is difficult for one corporation to garner the expertise needed to excel in all elements of the supply chain, and it increases their risk, so corporation around the globe have turned instead to outsourcing those aspects of their business in which they judge themselves to be least effective.
  • Lateral supply chain management has replaced vertical integration as the favored approach to managing the myriad activities in the supply chain.
  • We usually assume that the customer-producer-supplier illustrations refer to three separate companies. This is, of course, not necessarily the case; the entities could be departments within one company.

Vertical Integration

  • By bringing many supply chain activities in-house and putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor and control supply chain activities.
  • A vertically integrated enterprise may grow from an entrepreneurial base by adding departments and layers of management to accommodate expansion, or it may be built through mergers and acquisitions.

  • The primary benefit of vertical integration is control.
  • A department or wholly owned subsidiary with no independent presence in the market place can’t deal with competitors to sell its components or services at a higher price.
  • Its operations are completely visible to the parent company (at least in theory) and can be synchronized with other company functions by directives from the top.
  • Its schedules, work force policies, locations, amounts produced, all aspects of its business are controlled by the overarching management.

Lateral Integration

  • When corporate ownership turns instead to outsourcing various activities, it loses control of these aspects of the supply chain and will deal separately with members of the chain as supplies or customers.
  • Each of them will focus on their core competencies such as extraction or production and deal with each other through discrete transactions or by longer-term contracts.

**Some Japanese companies favor an intermediate form of integration called KEIRETSU.

(Definition) KEIRETSU is a form of cooperative relationship among companies in Japan where the companies largely remain legally and economically independent, even though they work closely in various ways such as single sourcing and financial backing.

A member of KEIRETSU generally owns a limited amount of stock in other member companies

A KEIRETSU generally forms around a bank and a trading company, but “distribution” (Supply Chain) KEIRETSU alliances have been formed of companies ranging from raw material suppliers to retailers.

  • Rely on lateral supply chain:
    • To achieve economies of scale and scope.
    • To improve business focus and expertise.
    • To leverage communication and production competencies.
  • Despite the benefits of the lateral chain, however, synchronizing the activities of a network of independent firms can be enormously challenging.
    What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes or to care about them.

  • Horizontal doesn’t quiet capture the complexity of the global supply network with multiple connections around the world and information shared on networks connected all along the chain.

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