The current speed of manufacturing and retail demand a fast and efficient supply chain. Integrating the supply chain so that all parts of it work in unison can reduce redundancy, increase efficiency, and drive growth for everyone involved. And an efficient logistics operation is vital to an integrated, smoothly running supply chain.
So what exactly is supply chain integration, and how do you go about doing it so your business can reap the bottom line benefits?
What is supply chain integration?
In 1989, Graham C. Stevens, who was a senior managing consultant at Peat Marwick McLintock in London, published an article titled “Integrating the Supply Chain” in the International Journal of Physical Distribution & Logistics Management. In his article, he proposed that companies that managed the supply chain as a single entity would be more successful than companies that didn’t do this.
Stevens’ article is commonly considered the “beginning” of the concept of supply chain integration, but in fact, his idea had been put into practice a hundred years earlier by Andrew Carnegie.
In the 1880s, Carnegie expanded his steel operations by buying iron mines and railroad companies, effectively lowering costs and increasing productivity across the board, without triggering the fears of monopoly — and thus the risk of antitrust suits — that had been stirred up by his contemporary John D. Rockefeller’s horizontal integration strategy of buying up all his competition.
Today, in an era of increasing competition among supply chains, companies are seeking to gain any advantage they can, and integration of the company’s network of business relationships is key to success.
When a supply chain is integrated, all stakeholders in that chain share the same objective and are aligned in their efforts to achieve it. To achieve this aim, they collaborate via compatible systems and processes that provide clear visibility from supplier to consumer.
In other words, all parties involved in moving the right product to the right place at the right time for the right price to please the customer or end user — from raw materials to delivery and customer service — work together using compatible technology and share all information necessary to meet that objective.
As we saw in the case of Andrew Carnegie and John D. Rockefeller, there are two main types of supply chain integration: vertical and horizontal. Let’s look at each in turn.
The highest level of vertical integration is when the supply chain of a company is actually owned by the company. Used more generally, the term refers to any moves that incorporate different levels of the chain, both “upstream” and “downstream.”
An example of vertical integration is Italian eyewear company Luxottica, which owns 80% of the market share of companies that produce corrective and protective eyewear as well as owning many retailers, optical departments at Target and Sears, and key eye insurance groups, such as EyeMed.
A company could implement this type of integration by buying one or more upstream or downstream entities, or by developing its own capabilities for handling the whole of the supply chain, or at least a greater proportion than it already handles.
Horizontal integration is exactly what it says: any moves related to the same “level” of the chain as the organization making them — i.e., moving sideways. It could involve internal expansion, or merging with or acquiring firms that supply similar products or services.
An example of horizontal integration is the 2015 merger of Heinz and Kraft Foods, which both produced processed foods and became a single company in a deal valued at $46 billion.
This strategy is less related to supply chain integration and more to do with gaining benefits such as economies of scale and economies of scope, and there is a danger of cornering so much of the market that the company would be considered to be a monopoly and face regulatory pressures.
A looser type of horizontal integration is a horizontal alliance, in which entities providing the same product or service cooperate while remaining legally independent. Again here, however, the parties to the alliance need to be careful not to stray anywhere near price fixing or other monopolistic behavior.
Benefits and challenges of supply chain integration
Done well, vertical supply chain integration in particular results in a host of benefits. Here are some of the major ones.
- Improved inventory management
- Better understanding of customers and better ability to serve them
- Greater cost-efficiency and cost-effectiveness with increased ROI and profit margins
- Less wasted materials and time, and less redundancy in supplier function
- Known costs, making it easier to set a profitable product price
- Better ability to keep up with demand and more flexibility to adapt to changing markets
- Less risk and increased competitiveness
- Better opportunity for investment as a result of collective power
- Early warning of problems at any point in the supply chain
- Improved quality control, since all parties are working toward the same goal
- Lower costs for end consumers
- Increased control of market share and raised barriers to entry for competitors
- Eliminated or reduced reliance on competitors and suppliers with conflicts of interest
Despite being a known beneficial business strategy for the last thirty years, supply chain integration is still not a commonly implemented strategy. That’s because it’s easy in theory, but difficult to successfully put into practice.
These are some of the challenges to be aware of when considering integration, whether vertical or horizontal. They can be roughly grouped into two types of challenges: psychological and technological/mechanical/functional.
- Creating a shared vision of how integration will improve both financial and intangible results for everyone involved
- Adjusting the organizational culture in a way that gives people a reason to support the supply chain vision
- Making decisions in the context of shared supply chain considerations
- Building trust within and between all parties
- Maintaining strong leadership when organizational cultures are mixed
- Less incentive for suppliers to control quality and price
- Sharing risks and rewards in a way perceived by all partners as fair
- Maintaining consistency in relationships with suppliers and customers
- Establishing metrics focused on the end customer that are used throughout the chain to improve quality control
- Joining sales and operations into a single effective process and preventing miscommunications
- Implementing reliable IT infrastructure and keeping all partner suppliers using it
- Effectively using analytics to support decision making in a complex partnership
- Potential loss of strategic core competencies through overexpansion
- Less flexibility due to all partners relying on the performance of the same products
Strategies for successful supply chain integration
For a company that wants to integrate its supply chain, the first step is to determine which type of integration will be most advantageous, and to what degree.
Would your company benefit most from the simple step of selecting specific vendors to provide specific inputs, and then developing agreements with them to provide certain quantities each year (or quarter, if sales tend to be seasonal) at a set cost?
Or would your company be better served by a deeper integration, such as investing in insourcing all core competencies — activities that your company does better than others — and developing close partnerships with the providers you outsource the remaining activities to?
For this step, there are five main factors to consider:
- The strategy and vision of the role that supply chain management plays within your organization: Streamlining and expediting delivery? Tightening partner relationships? Dominating the market and erecting barriers to entry for (would-be) competitors?
- Whether you will compete on price or differentiation.
- Your supply chain architecture — logistical realities, information flows, cash flows.
- Your organization’s strengths, weaknesses, and future plans.
- Your organization’s tolerance for integration.
Once you have that information, you can then consider the following degrees of integration:
- Baseline: Information is siloed as each department in the company works separately. This is how most companies currently operate.
- Functional Integration: Information and operations are shared throughout all departments in the company, with the purpose of increasing efficiency.
- Internal Integration: All departments are connected in one IT structure, but each link is still functionally separate and working towards its own targets.
- External Integration: All companies in the supply chain are sharing information and operating almost as a single unit to meet customer needs and desires, and increase efficiency and profits for everyone involved.
The next step is to look at the challenges you might face in implementing the integration. Use the list above as a starting point, but also analyze your own operations and those of your intended partners. This is when all parties should sit down together and take a hard look at what would need to be done to make the integration work, both the intangible and the tangible factors.
Once you have a clear idea of the road ahead, it’s time to get everyone on board, both the people in your company and the organizations you’ll be partnering with. Show how the integration will benefit all parties. For support, use compelling data on redundant operations (wasted time and resources), cost redundancies, stagnant information flows, as well as benefits like increased sales and growth projections. Find ways to add value to all involved.
Then create a comprehensive plan that makes integration logical, touches as few hands as possible, and deals with needs fluctuations and the potential for growth.
With everyone on board and a clear plan agreed upon, it’s time to start on the technical aspects: integrating functions and data and determining information flows. The solution you decide on for this aspect will depend primarily on the need for information sharing. There are three main levels:
- Information is shared among the chain’s organizations, improving relationships and softening boundaries to enable better outcomes for all involved.
- All partner organizations use the same information system and software, so that data is not only shared but also accessible to all relevant parties.
- Both information and processes are shared. All parties in the connected chain function like different departments of the same company.
There are some key things to remember when implementing a supply chain integration strategy:
- Everyone needs to be on board with a collaborative mindset. This type of integration is a profound concept, and without the right mindset, no amount of technological integration will make it work.
- Create a standardized collaboration infrastructure and leverage information for the benefit of all stakeholders.
- Focus on core competencies and make sure all parties agree on the metrics and expectations.
- Pay continuous attention to the final customer. If the integration is not serving the end consumer, it won’t fully benefit the entities that are involved.
- Encourage face-to-face meetings. These are the best way to overcome differences and generate ideas and creative solutions.
The tantalizing ideal of an integrated supply chain is that it will drive growth in both revenue and profit margins for all partners in the chain. It is the job of everyone involved to keep their sights on this vision and see the benefits of working together to increase efficiency and surmount the inevitable challenges, creating a whole that is truly greater than the sum of its parts.
Sources: Smartsheet; Supply Chain Management Review; National Research Council, Surviving Supply Chain Integration (Ch. 3), Washington, DC: National Academy Press (2000).