More About Vertical Integration
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 part – and is comprised of all of the suppliers that participate in the sourcing, manufacturing, assembly, and logistics processes. Vertical integration occurs when a company acquires additional stages of the supply chain. For example, instead of solely manufacturing parts, a company broadens its offerings to also perform final product assembly. The key concept is that vertically integrated suppliers control more steps in the supply chain.
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 only performed machining activities expands to include distribution – 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