Question

Vertical Integration: Please locate a business that uses it. Explain the benefits as well as the problems using vertical integration in that particular business.

Answer 1

Vertical Integration :

It is when a company performs more than one stage of supply chain. That is the process of conversion of raw materials into final product and supply it to the consumers. There are 4 phases in vertical integration. They are commodities, manufacturing, distribution and retail. A company vertically integrates when 2 or more phases are carried out.There are two types of vertical integration

• Forward integration : it is used when the company is at the initial phase of the supply chain. For example downstream activities by steel companies will use it.

• Backward integration : it is used at the end of the supply chain which takes the upstream activities. For example it is used by movie distributors who manufactures content.

Example company : Target Corporation - it is the US based company and is second largest discount store retailer.

This is the company which owns it manufacturing, controls the distribution and is the retailer. As it cuts out the middlemen, it can offer a branded like product at much lower price.

Advantages :

• Company doesn't rely on suppliers.
• Making manufacturing itself more efficient.
• Lowers internal costs and have better delivery of needed items
• Can create products similar to banded and marketing and packaging.

Disadvantages :

• Huge capital is invested as to maintain the manufacturing unit running to maintain efficiency and profit.
• Cannot follow the trends and reduce flexibility.