The Re-rise of Vertical Integration: Mega or Dead Supply Chains?

Outsourcing has been prospering since the 90s for various reasons such as cost reduction, focus on core competencies and a long list of others. But if you have been following the news lately, it is hard to overlook the shift to ‘vertical integration’ by a number of leading companies such as Oracle, Apple, Arcelor Mittal, GM, Boeing, Pepsi, Tata to name a few. Oracle has been on a spending spree over the last few years by acquiring just about any maker of software, computers, and computer components. The intent is to sell ‘complete systems’ made of chips, computers, storage devices and software from Oracle.

Apple, which exited the semiconductor business recently shifted its strategy by silently grabbing small semiconductors suppliers so it can develop its own chips to meet its popular new devices.

General Motors, despite its struggle, is also moving towards a lean vertical integration model by grabbing a number of struggling suppliers (e.g. Delphi) and purchasing factories. Pepsi and Boeing are also following the same albeit for different reasons.

The trend towards vertical integration is driven by many reasons such as more control over raw materials (e.g. Arcelor), more control over parts supply (GM, Boeing), more control over beverage distribution (Pepsi), and strategic differentiation (Oracle, apple).

Vertical integration is a century old strategy pioneered during the industrial revolution. The old style vertical integration usually crossed multiple industries and was referred to as horizontal integration. This ‘new vertical integration’ involves mostly mergers and acquisitions within an industry. These new trends, whether they make sense or not, beg the following question: what is the impact of vertical integration trends on supply chains? Will they disappear or become more complex?

With vertical integration, an organization controls the supply of raw materials and the delivery of its products. In other words, it has ‘complete control’ over its supply chain. In my view, this new style vertical integration will make supply chain much more complex to manage and control. Let me cite an industry well known for vertical integration as a case in point. The Oil industry has long favored vertical integration from Rockefeller’s days to Exxon Mobil. Yet their supply chains are not on any one list of best-in-class supply chains. Bureaucratic, cultural and organizational issues have long plagued their supply chains which are often masked by the magnitude of the profits in this industry. In addition, as this industry shows, vertical integration does not necessarily mean owning the supply chain.

Regardless of the degree of vertical integration, supply chains are unlikely to disappear or become easier to manage or control. With multiple acquisitions, organizations end up having multiple supply chains each as complex as the other. The resulting supply chain is slow and bogged by process inefficiencies and limited internal collaboration.

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Farid Harche

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