Supply Chain Management, Vertical Integration and Horizontal Integration of Business Structure - Research Paper Example

Supply Chain Management, Vertical Integration And Horizontal Integration Of Business Structure Table of Contents Table of Contents 1 Supply chain management 3 Vertical integration 5 Horizontal Integration 8 Comparison and contrast of Supply Chain Strategy 10 Conclusion 13 Bibliography 15 Introduction Supply chain management is a business management activity or process that is used to optimize the company productivities and inner expenses. Supply chain management is a significant tactical function proficient in fundamentally civilizing client worth methods through the re-engineering of Internet facilitated and intranet shared control business (Anderson & Lee, 2003). According to (Laudon & Laudon, 1999), “supply chain management integrates the supplier, distributor, and customer logistics requirements into a single reliable activity” (Laudon & Laudon, 1999). This paper will discuss about two terms, one is vertical integration and other is horizontal integration. However, vertical integration can be defined as an extent to which a corporate possesses its downstream buyers and an upstream supplier. For this reason it could have a major influence on company department's arrangement in its industry with respect to differentiation, cost as well as additional strategic matters. In addition, the vertical scope of the corporate is a significant concern in business strategy (Greaver, 1999). On the other hand, according to Clemente & Greenspan (1999), the accomplishment of extra business tasks at the similar intensity of the value chain is acknowledged as horizontal integration of corporate structure. In addition, this structure of growth is different from vertical integration through which a corporation develops downstream or upstream activities. However, Horizontal growth could be attained through internal growth or through external growth via acquisitions and mergers of companies presenting related services and products. In addition, a corporate could grow by expanding horizontally into unrelated businesses (Clemente & Greenspan, 1999). This research presets detailed Analysis Of The Horizontal And Vertical Corporate Integration Structures With Respect To Supply Chain Strategies For Both Types Of Companies. In addition, the main intention of this research is to present deep and detailed overview of the supply chain management, vertical integration and horizontal integration of business structure. This paper will also outline some of the main business organizations and their relation of the current research areas. Supply chain management According to ( (Turban et al., 2005, p.357), supply chain (SC) consists of information, payments, flow of materials, and services from raw material suppliers, through warehouse and factories, to the end users. In addition, a supply chain also encompasses the organizations and techniques that produce and distirbute information, services, and products to end users. Futhermore, it encompasses various activities and operations for instance payment flow, purchaseing, material handling, warehousing and logistics, production planning and control, inventory control, and distibution and delivery to the end users. However, the job of supply chain management (SCM) is to plan, systematize, and manage all the activities of the supply chain. In addition, at the present, the idea of supply chain management refers to a complete systems approach to organizing the entitre supply chain. Futhermore, supply chain management is normally implemented by information technology (Turban et al., 2005, p.357). Xiao & Zhang (2001) stated that at the present, electronic commerce and SCM have great significant interest in public and private corporations. In addition, the motivation of offering privileges to client as well as enhancing working performance in the contemporary digital financial system in the course of an incorporated, internet enabled supply chain that offers facility to jointly manage the logistics and manufacturing service departments swiftly. However, there are possible reimbursement that corporations could accomplish from electronic commerce since enhanced administration of the SC (supply chain) could be achieved through the enhanced information collection and information processing. Furthermore, at the present corporations have to carry out business operation and activities using “network technology”, since individual trade is no longer so popular (Xiao & Zhang, 2001). According to Sreenivas (2007) quick response (QR) is major feature of electric supply chain that is a “technique where the manufacturer struggles to proffer goods and services to its customers. Since, the main intention in the present business grounds is about the smallest amount of proposal time delivery of the customer products. However, the modern electronic SCM encompasses the scanning, bar coding as well as web based electronic communication to deal with data and information among sellers as well as dealers via electronic information data interchange (Sreenivas, 2007). Thus, the major intention of supply chain management is not to enhance the organization and management among producers and buyers. However, supply chain management involves the manufacturing and delivery of goods. In addition, to put into practice this administration practice successfully, corporations have to reorganize and realign their operational associations as well as operating systems with other linked parties. Thus, the corporation needs to use the information technology effectively, that supports internet based communications as well as dealings; since these are the necessary enablers of supply chain management plan (CNET, 2000; Venus, 2009) & (Bayles, 2002). Vertical integration The idea of vertical integration could be visualized by means of the value chain. Take an example, a corporation whose products and services are made through an assembly procedure. In such kind of corporate that can consider backward integration into intermediary manufacturing or forward integration into division, as specified in below given image (QuickMBA, 2007): Figure 1Vertically Integration [Image Source: (QuickMBA, 2007)] There are two main issues that we need to consider when making a decision for the vertically integration, these issue are control and cost. However, the cost feature relies on the cost of marketplace transactions among corporate versus the cost of administering the similar activities within a single corporate. On the other hand, the next concern is the influence of asset control that is able to influence barriers to entry as well as that can make certain collaboration of main value-adding players (Susan Crawford blog , 2010). According to (Clinton et al., 2008) there are a lot of advantages of the vertical integration that potentially present reduction in the transportation costs if general possession results in nearer geographic proximity. In addition, it enhances the supply chain coordination. Also, it offers additional opportunities to differentiate through augmented control over inputs. Since, the vertical integration captures downstream or upstream profit margins. This also augments the entry barriers to potential business competitors, for instance, if the company is able to achieve sole access to a limited resource (Clinton et al., 2008). According to (Clinton et al., 2008), there are also various drawbacks those can negate some of potential gains attained through vertical integration. The main problem is about the capacity balancing. For instance, the corporation can require constructing excess upstream capability to make sure that its downstream operations have enough supply beneath all demand circumstances. In addition, there is a problem of the potentially high costs because of little efficiencies consequential such as lack of supplier competition. Also, there is some decreased flexibility because of the previous downstream or upstream investments. Furthermore, there is some less capability to augment product diversity if major in-house development is needed. Thus, it could increase technical costs (Clinton et al., 2008). Horizontal Integration Horizontal integration is opposite to vertical integration, it is a potential strategic shift that a corporation can consider. In addition, the horizontal integration outlines that how to carry out business actions at the similar altitude of the value chain. In other words, horizontal integration is about the obtaining activities dealing by means of parallel products; consequently that synergies accumulate as well as there is an extent of ‘sensible’ diversification. For instance balancing confectionary products are supported through the similar fundamental marketing messages. Here acquiring tasks that are replacement for one’s products. Therefore a corporation could be able to cover up the danger from substitutes concerned as one of Porter’s 5 Forces (QuickMBA-2, 2009). Horizontal integration offers various advantages to the corporations. As Liden (2009) stated that main advantage is horizontal integration is Economies of scale that is attained by selling more of the similar products, for instance, through geographic expansion. Here we are also having more economies of scope that is attained via sharing resources widespread to diverse products. Furthermore, the horizontal integration also presents increased market control and reduces cost of global trade through service factories in foreign marketplaces (Liden, 2010). Figure 2- Horizontally Integrated Business [Source- http://www.informaworld.com/ampp/image?path=/713417253/915185542/ceps_a_423235_o_f0001g.png] Besides a lot of advantages horizontal integration also includes some pitfalls. In horizontal integration through acquisition of a participant will augment a corporate marketplace share. Despite the fact that, if the industry concentration rises considerably then anti-trust problems could arise. With the exception of legal problems, one more concern is whether the predictable economic achievements will materialize. In addition, previous to increasing the scope of the corporation in the course of horizontal integration, organization should make certain that the probable profits are valid. However, a lot of mistakes have been established by corporation that broadened their horizontal extent to attain synergies that did not exist, for instance, computer Hardware Company that enters into the software industry on the basis that there are synergies between software and hardware. Thus, a link among two products does not essentially involve possible economies of scope (Slrecord, 2010). Comparison and contrast of Supply Chain Strategy This section presents the detailed comparison between the horizontal integration and vertical integration in scenario supply chain strategies. One of the major advantages that a vertical integration offers is about the corporation’s capacity to manage both downstream and upstream activities in case of supply chain management. In this scenario Smithfield has taken huge advantage from this integration structure. Smithfield is one of huge powerhouses in the hog farming sectors. Smithfield has given more importance to the business strategy on acquisitions. As a consequence, the corporation structure since is apparent from its list of business devisors tremendously vertically integrated. The main advantage Smithfield attained through vertical integration is more flexibility that permits Smithfield to take advantage of possible supply chain coordination, transport costs, attained augmented differentiation in the course of better control over upstream activities (inputs), and take advantage of value added from additional areas of the value chain. Smithfield has achieved experience to downstream activities that might be unreachable and help in increasing attention on foundational competencies (Duke University, 2009). On the other hand horizontal integration structure has offered the capability to take advantage of on economies of scale. A company Tyson's that is also a huge hog farming business has taken advantage from the larger scale processes at one level of the supply chain consequential in augmented geographical expansion. The corporation is then able of drawing on resources widespread to every product, permitting the synergistic movements. In addition, the horizontal integration facilitates Tyson to attain chain dominance as well as achieve control over particular downstream and upstream activities (Duke University, 2009). According to Wangler & Paheerathan (2001) a usual instance of horizontal integration in supply chain management is a way through which an organization attempts to optimize the inclusive set of tasks such as purchasing, shipment, production, order entry etc. In order to reduce the lead-time as well as expenses intended for production, organizations need to maximize value intended for the customer (Wangler & Paheerathan, 2001). In case of vertical integration a supply chain is a set of associations openly linked with one or more of the downstream and upstream flows of services, products, finances, and information from a source to a target (Wangler & Paheerathan, 2001). As discussed earlier there are three varieties of vertical integration (upstream, downstream and balanced). According to Folsom and McDonald (2007), a corporation demonstrates backward vertical integration when it manages its business subsidiaries that generate a number of inputs employed in the manufacturing of its products. For instance, an automobile business can own a tire business, a glass corporation, as well as a metal business. However, the management of these 3 sub-divisions is intended to make a steady supply chain that inputs as well as guarantees a reliable quality in their ultimate product. It was the major business technique of Ford as well as other car corporations in the 1920s, which required reducing expenses via centralized manufacturing of cars as well as car parts (Folsom & McDonald, 2007; Supply Chain Integration, 2008). As Folsom and McDonald (2007) and (Supply Chain Integration, 2008) outlined that a business would be liable toward forward vertical integration when it manages the supply chain distribution centers as well as retailers where its goods are sold. Besides this in case of balanced vertical integration states that a corporation manages the entire of these mechanisms, from raw materials to the development of final delivery. However, all these diversities noted are simply abstractions; real corporations utilize a broad range of subtle variations. Suppliers are frequently contractors, not officially owned subsidiaries. Since, the clients can efficiently manage a supplier if their contract exclusively guarantees the supplier's productivity. In addition, the retail and distribution partnerships show likewise broad ranges of interdependence and complexity. In comparatively open capitalist contexts, clean vertical integration through explicit rights is unusual as well as distributing ownership is normally a strategy intended for distributing risk. Let’s take an example of Carnegie SteelOne that was one of largest as well as most well-known company and is an example of vertical integration. The corporation controlled not merely the mills wherever the steel was produced however as well the mines from where the company was extracted the iron ore. Here in this vertically integrated business of SteelOne the business own the coal mines that supplied the coal, also the ships that transported the iron ore as well as the railroads those were used for the transpiration of coal to the factory, besides this SteelOne was also owned the coal ovens where the coal was cooked. SteelOne was as well focused a lot on developing talent within from the bottom up, relatively than bringing in it from other corporations (Folsom & McDonald, 2007; Supply Chain Integration, 2008). Now I will discuss the horizontal integration based corporate supply chain strategy. Dell is a supreme corporation in the PC industry. The business of Dell is operating by using the horizontal integration based corporate supply chain strategy. The new and enhanced supply chain strategy has made the Dell’s dominance of the PC business that has terrible outcomes for competitors like Compaq. However, in the past Dell announced its new strategy to then move after the profitable printer market, presently captured by Hewlett Packard. In addition, Compaq and HP determined to combine, to effectively combat this risk. CEO of HP Carly Fiorina stated that this merger of both corporations would carry better cost savings by eliminating duplication and augmenting economies of scale. However, some of the reviewers stated that merger of corporations still can not race with Dell’s well-organized horizontal integrated supply chain management. It is also stated that Dell’s accomplishment by means of a no-services strategy reveals that offering services is not essentially in favor of productivity (Houghton Mifflin Company, 2009; Supply Chain Integration, 2008). Conclusion In case of both horizontal and vertical integration corporations are having similar intentions but different ways of monument of supply chain. This research has compared both the organizations and their operational structure. In the start the paper discussed about e-commerce or Electronic Commerce, which is a process of carrying out business activities using Internet. In addition, at the present, the internet has changed and revolutionized not simply the means through which goods are sold, however how they are distributed and delivered to buyer. In other words, the techniques of e-commerce have modernized the traditional business practices. Since, the implementation of supply chain comes in the e-commerce. However, through the present Electronic Commerce based technology customers demand products distributed at extremely high speed by means of complete order convenience and flexibility. In addition, presently online clients desire to be able to track their orders quickly, since, at the time they place or book an order and without waiting the moment they take delivery of it at their doorstep. According to Groznik (2008) all these aspects denote that the power has transferred from the seller to the buyer and as well as offered latest opportunities (Groznik, 2008). In this scenario modern supply chain management systems will turn out to be of paramount significance for gaining competitive advantage. These modern supply chain management systems have fundamentally reshaped the method through which the products/goods are produced, supplied, returned and delivered. This paper has presented a detailed analysis of the supply chain management, vertical integration and horizontal integration of business structure. In addition, this paper has outlined some of the main businesses and their vertical and horizontal integration based supply chain strategies. This research has spotlighted the main areas, potential enhancements or degradation due to new business integrations. I hope this research will offer comprehensive overview of the vertical and horizontal integration based supply chain strategies. Bibliography Anderson, D. & Lee, H., 2003. New supply chain business models – the opportunities and challenges. [Online] Available at: http://jobfunctions.bnet.com/abstract.aspx?docid=90031 [Accessed 20 February 2010]. Bayles, D.L., 2002. E-LOGISTICS & E-FULFILLMENT: BEYOND THE “BUY” BUTTON. [Online] Available at: http://r0.unctad.org/ecommerce/event_docs/curacao/bayles.pdf [Accessed 20 February 2010]. Clemente, M.N. & Greenspan, D.S., 1999. Winning at Mergers and Acquisitions : The Guide to Market Focused Planning and Integration. New York: John Wiley & Sons Inc. Clinton, S.R., Manna, D. & Marco, G., 2008. A Case Series Of Today’s Vertical Integration. Journal of Business Case Studies, 4(7), pp.47-52. 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