While working in different businesses and industries, you might have come across the terms horizontal integration and vertical integration.
These two concepts underline the integrated supply chain management and help the company to gain a competitive advantage.
Horizontal integration is a method of supply chain management in which a particular company adds more business units under its control. Whereas, vertical integration is a method of supply chain management that acquires an extra business unit with a similar type of production.
Nowadays, countries are competing with each other to get their goods manufactured in cheaper markets and sent to the final consumers in different parts of the world. This has led to the integration of supply chain management processes and systems, along with the increase in globalization.
In the process of Integrated Supply Chain Management, many organizations face some difficulties and challenges, which are overcome by adopting Horizontal and Vertical Integration. So, let’s briefly discuss what all these terms are and how they can help in business.
What is Integrated Supply Chain Management?
Integrated supply chain management is a process of taking the whole network of involved organizations, viz., suppliers, customers, vendors, distributors, and the like, into the scope of supply chain management.
It is the model which converges different working units that are functionally interdependent. The process of integrated supply chain management aims at better coordination of supply functions that are spread across multiple organizations and cross-functional operational improvements.
Due to globalization, the whole network of involved organizations has become complex and effective coordination is required to improve organizational performance and customer satisfaction.
You can say that the essence of integrated Supply Chain Management is that the whole network of involved organizations is taken into the scope of supply chain management.
Horizontal and Vertical Supply Chain Management
Once an organization has recognized the need for an integrated supply chain, the next step is to formulate a strategic plan for the implementation of an integrated supply chain. The integrated supply chain plan should consider both horizontal and vertical supply chain management approaches.
Horizontal supply chain management is a collective of companies that collaborate to improve performance and better manage the shared supply chain.
This management implementation should be the first step toward supply chain integration.
Vertical supply chain management involves collaboration between two or more tiers of the supply chain (i.e. suppliers, vendors, contractors and customers) and is the cornerstone of a successful supply chain network.
Vertical supply chain management should begin with the design, manufacture and assembly of products. For this, tiers of the supply chain need to define and share goals, objectives, plans and metrics.
Benefits of Integrated Supply Chain Management
Hope that you have understood the concept of integrated supply chain management. So, along with this, you should also be aware of its benefits.
This approach to management has many benefits but, here we have mentioned few of its main benefits:
- Reduced overall cost
The supply chain has several cost drivers, including inventory, transportation and logistics, and returns management. The cost of holding inventory can be quite large, but there are other costs as well.
Customers may not actually understand the cost of inventory management in the supply chain, especially if they do not buy or sell very often, but they do expect to pay a low price.
- Reduced risk
The supply chain is full of risks. One way to reduce these risks is to move the risk downstream to the customers and suppliers.
In this way, the supplier can still get paid for the work even if the product does not sell. Customers can buy products that are very close to the end of their life cycle, which will help to reduce the overall price of a good or service.
- Reduced investment in data collection and analysis
Manually collecting and analyzing data about the supply chain can be very expensive and time-consuming. The more data that is collected, the more money that is spent analyzing it.
In the end, we would like to add that integrated supply chain management is an approach to planning, organizing, and controlling the entire supply chain of products or services from the supplier to the customer.
This approach mainly allows businesses to optimize their operations by reducing costs, increasing efficiency, and maintaining high-quality products. It is also important to note that this approach is different from vertical integration where one company owns all the parts of the production process.
Moreover, in an integrated supply chain, companies may collaborate with other suppliers and manufacturers, but each has its specific functions. This approach helps reduce the risk of obsolescence, increase profitability, and improve customer satisfaction.
So, Do you think that integrated supply chain management can help you in your career? What other areas do you see it being used in? Let us know your thoughts in the comments below.