Ideal vertical integration
Determine the correct proportion of in-house production in the production process.
Minimal cost versus robust supply chains
Every company has to face the discussion about an ideal level of vertical integration. The restriction to core competencies and expanded outsourcing to reduce the vertical range of manufacture were guiding principles in the past, leading to increased competitiveness and increased flexibility in global markets.
In the 90s, there was a strong trend towards outsourcing and towards an ideal image of a Lean company through operational reorganization. However, it became clear that the cost savings achieved did not always outweigh the purchased dependencies and the increased control effort.
However, the Covid-19 pandemic has shown that long supply chains and dependence on suppliers pose a high risk. Anyone who has the production of the essential sub-assemblies in their own hands can deliver in crises and does not suffer from externally caused production interruptions.
What is the optimal level of vertical integration?
A general answer to the question of the right of vertical integration do not exist for each company. How many and the selection of the production stages you set up in your own company and at which stages you rely on external service providers remains to be weighed individually. Among the reasons for a change in vertical integration (out- or insourcing) are cost savings, increased flexibility, for example, in case of overload situations or strategic motives (or build expertise internally as shopping with specialists).
Therefore, in the first step, the framework conditions must be analyzed. Then, in the second step, the strategy is developed individually at the corporate management level. Even against the background that the proportion of in-house production in the production process for companies is a relevant cost factor influencing the relevance shows a sound analysis of the “ideals of vertical integration” for the company.
Transparency with structured portfolio overviews
Vertical integration, also called production depth, is the vertical extension of the production. This means to what extent intermediate goods such as semi-finished products/assemblies or intermediate products are purchased from the market or manufactured in-house. In this case, the higher the level of vertical integration, the more independent the company from external suppliers. Basically, it comes to the question of the ideal vertical integration determining the perfect balance of specialized suppliers and rationalization options of an integrated production under one roof.
Example: Competence strategy portfolio matrix
How can the term “make-or-buy” be distinguished from the decision on vertical integration?
Make-or-buy (MoB) is understood to mean a decision between in-house production and external procurement. The difference between MoB and vertical integration is that MoB decisions are not limited to the production area. Here, for example, it can also be analyzed whether logistics services or other services are being outsourced.
We support you with the right level of vertical integration
- Sound analysis the ideal production depth
- Focus on your core competencies
- Strategic make or buy analysis
- Analysis of in-house and external production
- Outsourcing decisions
- Decision on outsourcing products
- Insourcing decisions
- Decision on in-house products
How we can help
ifp consulting can support you with a well-founded analysis of an ideal range of vertical integration. For this purpose, your core competencies will be analyzed to continue settling and expanding them within your company. For this, on the one hand, their resource strengths are taken into account, in which the financial strength and know-how strength are examined more closely. On the other hand, the technology attractiveness of your production technologies is taken into account in order to show what potential your technologies will also hold in the future.
We bring the know-how from the industry and the tools so that the make or buy strategy is optimally tailored to your company.
The content-related points must, however, be accompanied by other factors. This includes a team with the right skills and abilities and the use of the correct methods and tools. Here, classic spreadsheet programs can no longer correctly map the often extremely complex relationships. Our special software is, therefore, vital
What are the biggest mistakes in determining the level of vertical integration?
- Inconsiderate determination of the level of vertical integration or make or buy
- Underestimated follow-up costs