Operating activities are those that pertain to a company's core business activities, such as manufacturing, distributing, marketing and selling a service. Forward integration occurs when you take up roles that are closer to the final consumers in the supply chain. Outsourcing makes the most sense in industries where the cost of labor and capital resources are high and is usually the best choice for young … Businesses within the retail industry are rolling out vertical integration supply chain models to keep up with fast fashion. There may be hidden costs that are not immediately apparent if you don't have an accurate understanding of the contract's terms. Similarly, if you are outsourcing certain aspects of production, you can avoid the investment of purchasing expensive equipment. Vertical disintegration and the outsourcing of production One of the key SCM trends within the mid-market high street sector has been the vertical disintegration and outsourcing of the production function to a global network of independent subcontractors, usually within lower labour cost countries. Finding leadership that is well-versed in all of these industries can be challenging. Vertical integration to be distinguished from horizontal integration Horizontal integration is the addition of other business activities at the same level of the value chain. Vertical integration, especially if coupled with co-location, can provide significant cost benefits in the form of reduced material related overhead. However, logistics and supply chain management stands out as one industry where you can effectively adopt vertical integration, because vertical integration elevates your operation to different levels of your supply chain. Businesses within the retail industry are rolling out vertical integration supply chain models to keep up with fast fashion. It begins by defining the vertical chain of production. An additional disadvantage of outsourcing is that confidentiality can be compromised when you release certain documents to another company. There are four stages of the supply chain: A company has vertically integrated when it controls two or more of these stages. By using Investopedia, you accept our. The decision to vertically integrate or outsource depends on the nature of the business activities and the industry the business is operating in. For example, it may be more appropriate to outsource the storage and warehousing functions of your cargo haulage business than to maintain a network of your own stores and warehouses. Outsourcing and the Fashion Industry. Instead, the reversal results from outsourcing to a vertically integrated retail rival. Horizontal integration and vertical integration are competitive strategies that companies use … However, a business can provide a contract service to another business without necessarily insourcing that business process. By being able to acquire highly specialized assets, you will be able to differentiate your business from the rest of your industry, with a highly competitive advantage. Baseline: Is Outsourcing Losing Its Appeal? In recent years, outsourcing has become controversial. Companies that outsource get to benefit from the differences in labor and production costs in other countries. https://strategicmanagementinsight.com/topics/vertical-integration.html It allows you to invest in assets that are highly specialized. You can outsource functions such as payroll, information technology, research and development and customer care services. Vertical integration can give you a great advantage over your competitors, allowing you to invest and develop the products that you are currently offering. After decades of focusing on specialization and outsourcing to maximize profits, food and beverage companies are now extending their expertise up and down the supply chain through vertical integration. Similarly, the type of employee that is attracted to working at a retail business can be very different than the type of employee that works at a factory. Chapter 19 - Vertical Integration And Outsourcing CHAPTER 19 VERTICAL INTEGRATION AND OUTSOURCING CHAPTER SUMMARY This chapter analyzes the vertical boundaries of the firm. At the end of the day, this can increase efficiency. If the company is operating in a different time zone, it's possible that your business "partner" will be working while you are sleeping because your business hours are different. Fashion industry excels when the agents have a knowhow of latest trends, and thus outsourcing to specialists, outsourcing is necessary. Strategic Management Insight: Vertical Integration, Time: How Apple Made "Vertical Integration" Hot Again -- Too Hot Maybe. For instance, you may choose to incorporate dog training in your dog breeding business. This way, you get to supply your dogs directly to customers seeking trained dogs, rather than supplying the dogs to dog trainers. Vertical integration expands the presence and influence of your business, while outsourcing involves contracting some of your business operations to external service providers. A company that is vertically integrated can avoid suppliers with a lot of market power. The suitability of vertical integration and outsourcing depends on the nature of your activities and industry of specialization. Inditex’s unique business model mainly focuses on vertical integration and in-house production, while at the same time outsourcing is becoming a popular trend in clothing industry. choices on the change of vertical integration level and the performance implication of such changes. How Can a Production Plant Increase Sales & Reduce Costs? Vertical integration is merging different types of business that represent different stages of production. Vertical integration and outsourcing are some of the viable approaches for advancing your competitive edge. An obvious disadvantage of outsourcing is that you are turning over control of some of the management of your company to another company. Business executives often blur the line between outsourcing and subcontracting; however, in reality, the two practices are quite distinct. For example, you may opt to process dog food for your dog breeding business instead of buying processed foods from veterinary suppliers. Adoption of efficient operations structures enhances the competitive profile of your business. A company can avoid paying the salaries, benefits, and payroll taxes of additional employees if they outsource the tasks. This eliminates middle men in your supply chain by expanding your activities in the supply chain. Research on the global fashion industry predicts an increase from ‘$481.2 billion in 2018 to $712.9 billion by 2022’. Vertical integration is a risky strategy because it is complex and expensive. Over time, most companies save money and increase quality by implementing vertical integration. ZARA’s core competitiveness lies in the model used by it, called Vertical Integration. 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