Vertical Integration: Is it Right for Your Supply Chain?
May 5, 2022
At a glance
- Main takeaway: Companies are determined to control the future of their supply chain and are turning to vertical integration in hopes to combat rising inflation and the uncertainty of resources.
- Impact on your business: Taking ownership of your supply chain has its advantages, however, vertical integration comes with a steep price tag and potential challenges that should be addressed prior to making any decisions.
- Next steps: Aprio’s Manufacturing and Distribution Services team can help you evaluate the costs and complexities to determine if vertical integration is the right move for your supply chain.
Schedule a consultation with Aprio today.
The full story:
Supply chain disruption has become the norm as companies continue to struggle to reach levels experienced pre-pandemic. Over the last year, there has been a surge of companies considering vertical integration to address their supply chain challenges. While some may believe this to be a new trend in the market, vertical integration dates back to the Industrial Revolution.
What is vertical integration?
Simply put, vertical integration is a method used to gain greater control of resources and operations rather than relying on outsourcing. An effective vertical integration is achieved by taking ownership of a key component within the operations process to reduce manufacturing costs. This can be done by acquiring suppliers to manage and ensure a steady supply of scare resources, investing in warehouses and a fleet of delivery trucks to control distribution or developing a website and/or brick and mortar store to streamline the retail side of the business.
Vertical integration has been viewed recently as an attractive option for companies to switch up their tactics as a workaround to manage rising inflation. By purchasing existing assets rather than building new ones, companies can bypass the uncertainty of long lead times and skyrocketing raw material costs. There are numerous examples of this being reported from JetBlue announcing a bid for Spirit Airlines with sights set on their fleet of Airbus 320s, Intel acquiring Tower Semiconductor to expand their manufacturing capacity and Amazon, who has no shortage of warehouse space, increasing their footprint and fleet of delivery trucks to control distribution.
While expanding capabilities to restructure operations and distribution has its advantages, vertical integration is not without its difficulties.
By adopting this approach, companies can safeguard the future of their supply chain, however, like most things, it’s important to carefully consider the pros and cons before jumping in headfirst. Vertical integration comes with a hefty up-front capital investment to purchase the appropriate warehouse space, supplies and to keep operations running efficiently. It’s also a time-consuming process where top management must switch their focus away from core business strategies and growth and onto the newly acquired assets.
The bottom line
The rise in vertical integration is showing no signs of slowing down, much like inflation, as more companies look for opportunities to take ownership of their supply chain. While there are certain advantages that come with vertical integration, its important to connect with your trusted advisor to review the potential challenges that could arise. Aprio’s Manufacturing and Distribution Services team can help you evaluate the costs and complexities to determine if vertical integration is the right choice for your supply chain.
Schedule a consultation with Aprio’s Manufacturing and Distribution Team today!
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About the Author
Adam Beckerman is Aprio’s Manufacturing and Distribution Leader and Assurance Partner. Adam's team of 30 professionals focus on the manufacturing industry with 20+ years of experience enabling the success of manufacturing start-ups, growth companies and businesses preparing for equity events.