In the age of outsourcing the prevailing wisdom is to do as little as possible in house to streamline your operation. This strategy is not without merit, but it is not always the appropriate one for a manufacturing business. Sometimes bringing more aspects of the manufacturing process under the companies control is ultimately more beneficial (and profitable). While outsourcing brings the benefit of flexibility and lower overhead costs, it also comes with the relinquishing of control. You are reliant upon third party entities that you have little or no dominion over.
The Hands-On Approach
Backward vertical integration, which involves ownership of or contractual agreement with your downstream suppliers, gives companies the ability to ensure with more certainty that they will always have the materials they need for manufacturing projects--and at the lowest possible prices. Deadlines to distributors can be met more consistently, as supply issues will be more tightly controlled.
For many companies, relying on third party suppliers is quite problematic. The quality, consistency, and reliability of services rendered cannot be guaranteed, as the manufacturing company is often at the mercy of downstream suppliers. Bringing more facets of the value chain under one roof, so to speak, may come with its costs, but they are usually outweighed by the benefits.
Practical Application
Becoming more vertically integrated does not mean you must take control over every aspect of the supply chain. This is hardly practical for most manufacturers, and frankly, is unnecessary. After careful analysis of the value chain, an assessment can be made regarding which aspects would be most beneficial to take more control of, and which can be left to third party entities. Successful vertical integration involves striking the appropriate balance between what is done in-house and what is outsourced.
Integration vs. Outsourcing
Sometimes outsourcing is the appropriate choice for a company to make, as the advantages of bringing things in-house are outweighed by the cons. Benefits of outsourcing include:
- Cost savings
- Insufficient staff for in-house production
- Lack of space or capacity
- Lack of technical abilities
- Minimization of inventory
- Mitigating the risk of technical errors
Advantages of In-House Production
Bringing production under your control also comes with myriad benefits including:
- Avoiding supply insufficiencies
- Control of the processes
- Protection of proprietary designs
- Reducing shipping and handling costs
Over the long run vertical integration can lead to the substantial growth of your company if it is managed properly. Control over process like engineering changes, production costs and project scheduling can make your business much more capable in handling a wider range of client needs, which will increase demand. Having power over a wider span of your overall operation puts you in the driver's seat, and gives you the flexibility and capacity to grow your business in a number of possible ways.
Most manufacturing companies would benefit most from backward vertical integration; acquiring or partnering with a major supplier. A more thorough strategy would involve doing the same with upstream distributors.
