Vertical integration: a solution to supply chain problems?


Vertical integration has frequently appeared on the agendas of board meetings as a consideration to deal with the prospect that current supply chain disruptions are becoming more the norm than a COVID-induced outbreak. .

Trying to compensate for supply chain issues through vertical integration may prove to be a viable choice in some minimal cases. However, in most cases tThe issues facing supply chains today reflect a lack of depth in supply chain planning, which typically only focuses on short-term surface considerations and poor decisions about the business. procurement and application of supply chain management (SCM) software, as well as selection and relationship with logistics service providers.

Yet, without specifically addressing the strategic SCM discussions in active consideration by clients, I can verify that a modified version of vertical integration is widely viewed by businesses, although the realities of it tend to demand some degree. reluctance.

Henry Ford was a brilliant guy, but investing in steel production was a disaster. And then there are the LTV management school case studies always highlighting Jimmy Ling’s revelation that trying to manage various activities in which one has no expertise ultimately leads to all the suffering and the greatest bankruptcy of an era.

Despite my coach’s periodic statements to the contrary, I was a fairly decent college defensive end. However, I didn’t have the skills or understanding to operate safely, even though it was still just defense. Contrary to popular belief, management is not just management.

Perhaps one of the smartest actions Jeff Bezos has ever taken was acquiring Kiva. In doing so, he was committing the full capacity and continued capacity growth of Kiva to the ever-expanding robotics needs of Amazon’s thriving distribution operation. In this case, there was no reason for conflict between external clients over preferential treatment.

Companies looking for a possible acquisition of suppliers producing components of any scale, beyond the production requirements of the buyer, will find themselves in a profession of which they are not particularly expert. They will potentially be faced with draconian decisions regarding the sale of this excess production (necessary for efficient production), with the likelihood that the external market will include direct competitors.

Acquiring a smaller supplier with a production capacity that the purchasing company can fully absorb is a decision that many companies are currently considering. These types of purchases appear to be the most likely to become routine transactions, primarily based on equity and labor contracts with cash incentives, each tying the management of that entity to the current operation, with titles modified. This is because it would add another element to the normal manufacturing cycle, most likely improve procurement costs, reduce logistics expenses (while lending increased leverage to service providers), and allow component changes to be made. pretty much on demand. I can say with certainty that this is something that we will see with some frequency.

Capital investment in the production of entirely new components, although under discussion, is not viewed with much favor. At other times, this would seem the best route. Start over, without effectively buying someone else’s problems in the process.

With components that can realistically be produced in sufficient quantities to prove profitable, investing in new production is the path that we will likely see emerge as more common later in the decade. This will be all the more true as access to production equipment becomes more easily accessible than it is now (with machine tool production close to a record level) and the cost of construction will moderate. (It’s not going to go down.)

However, there is one glaring obstacle that is currently impacting existing production capacity: skilled labor is valuable and will likely continue to be the primary regulator of the production engine.

However, one glaring obstacle currently impacting existing production capacity: skilled labor is valuable and will likely continue to be the primary regulator of the production engine.

Almost every senior manager I have spoken with in the past few months is singing the same refrain: Unless we make a national commitment to dramatically expand the training of a workforce capable of functioning in production environments of today and tomorrow, especially technical and business skills economic expansion will slow to a crawl.

Building new factories and installing new equipment will not make sense if there is no one to operate that equipment. Employee loyalty and business continuity have proven difficult to maintain in the recent past. When the basic economy of supply and demand comes to support in a tight qualified labor market, everyone sees themselves as a free agent. And this is the biggest obstacle to vertical integration.

After World War II and the Great Depression, an educated workforce and advanced infrastructure catapulted the U.S. economy into a lead that was unsurpassed for eight decades. Nowhere was this more true than in the manufacturing powerhouse that was our Commonwealth of Pennsylvania. Yet federal and state legislatures appear determined to reduce, not expand, spending on education and training, the very factors that would support corporate manufacturing commitments, offshoring, and increased control over the SCM.

Chuck Franzetta is CEO of Franzetta & Associates. Since 1981, he has provided SCM consulting, marketing assistance, training and SCM talent recruitment services in various industries. He is also chairman of the editorial board of TheProfitChain.com.

contributor, Logistics, Scm Software, Supply Chain Management, Training, vertical integration
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