vertical and horizontal strategy in scm

8/10/2019 Vertical and horizontal strategy in SCM

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Supply Chain Management // Prof. Dr. Wollny

Vertical and horizontal cooperation in a

Supply ChainNovember, 9th2011

Supply Chain Management: Strategic Issues


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Agenda

1. Introduction

2. Vertical Cooperation

3. Horizontal Cooperation

4. Conclusion

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1. Introduction: Development of Value Chains

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cf. Seuring & Goldbach (2002)

Business cooperation is generally a collaboration between mostly few juridically

and economically independent companies to raise the common competitiveness

Becker et al. (2011)


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1. Introduction: Development of Value Chains

Triggers for rising cooperation in SC

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Increasing competition

Increased customer requirements due to the development from sellers to buyers

market (pushpull)

Cost reduction and efficiency potentials are stronger in processes than in products

Outsourcing of operations with little strategic importance in order to concentrate

on own core competences

Lack of own (financial) resources

Bullwhip Effect

Modern technologies allow efficient networking between companies


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1. Introduction: Objectives of cooperation

Improving costs, productivity and flexibility

Meeting the customer expectations

Generating synergies

Pooling the resources

Sharing specific strengths and capabilities

Sharing Know-How

Gaining an effective governance (only cooperation with centralized management)

Gaining of stability and sustainability of supply chains

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1. Introduction: Forms and fields of cooperation

Attributes Characteristics

Direction horizontal vertical diagonal

Expansion local regional national global

Duration temporary unlimited

Fields of

cooperationR&D distribution purchasing marketing production

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Forms of cooperation:

Service Agreements

Joint Ventures

Cooperatives

Consortia

Cooperative Agreements

Licensing


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Companies of different stages of the value chain are working together

Aim: Gain a benefit out of the cooperation

Cooperating companies stay legally and economically independent

Can be limited to a part of business of a company

Cooperation are often limited in time

Types of cooperation

Forward cooperation: working together with companies closer to the final customer

Backward cooperation: working together with companies in the direction of

procurement

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Vertical

Buyers

Stores

Importers

Manufacturers

Suppliers

Commodity

producers

Forward

Backward


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2.1 Vertical Cooperation: Alternatives

Vertical Integration

When a company expands its business into areas that are at different points of

the same production path

Types of integration Forward integration: Acquisition of activities closer to the final customer

Backward integration: Acquisition of activities in the direction of procurement

Important factors: costs and control

The level of vertical integration depends on the relations with suppliers (form of

cooperation, type of contract)

Goal: Achieving the optimal vertical integration

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2.2 Vertical Cooperation vs. Integration

Common Advantages Improve supply chain coordination (reduced Bullwhip effect)

Higher control over inputs and the whole Value Chain

Increase entry barriers to potential competitors

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Integration

Reduce transportation costs

Participate upstream or downstream

profit margins

Lead to expansion of core competencies

Decreased flexibility

Cooperation

The company remains independent andtherefore flexible

Easy exit of cooperation

No high capital investments required

Risk of Know-How outflow

High dependency on strong partners

Common Disadvantages

Higher coordination costs

Lack of supplier competitionhigher costs, less efficient

Differences


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2.3 Vertical Cooperation: Example

Vertical Cooperation: Toyota

Supplier Organization (Level of responsibility)

1stTier Supplier: In depth relation ship to Toyota

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nd

Tier Supplier: Produce individual parts Scale of Cooperation

Product development teams

Cross-sharing of Personal (Workers and Mangers are exchanged)

Sophisticated communication between Toyota and Suppliers

Suppliers are Partners

Build up and training of suppliers

Focus on long term relationship

SCM Concepts in use

Kaizen

JiT

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2.3 Vertical Cooperation: Example

Advantages for Toyota

Integrated system (JiT)

High quality

Shared development costs

Cost reduction

Secured supply

High influence on suppliers

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Advantages for Suppliers

Economies of scale

Constant orders

Know-How transfer

Shared development costs

Shared financing

Not easily replaceable


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2.4 Vertical Integration: Example

Vertical Integration: Starbucks

Overview

Biggest Coffee House Company in the world

About 17,000 Stores in over 50 countries Mission: To supply the customer with ...the finest coffee in the world...

Past strategy:

Buy beans from Suppliers, ensuring quality via high price (incentive) and quality control

Bean Roasting fully integrated into the Supply Chain, to grant top quality coffee

New strategy

Complete backward integration

Purchase of a coffee-bean farm in china

Training and educating employees

Ensure quality with own farms and Know-How

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2.4 Vertical Integration: Example

Reasons for Starbucks decision

Opening of the Chinese Market and the continues rapid growth

Limited supply of high quality Arabica beans

Increasing prices (+50% in price for Arabica beans)

Direct control of quality in all stages of production

Ability to maintain perfect quality through-out the whole value chain

Ability to control the full customer experience

Control of the moral hazard issue (bad reputation of coffee production)

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Two companies of the same industry and in the same stage of production work

together

These companies belong to the same supply chain stage and normally produce or

trade the same products

Firms add their strength to gain benefits

Affects the processes and structure design of distribution networks

Cooperation creates a change of existing hubs

Requires inter-firm coordination


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Buyers

Stores

Importers

Manufacturers

Suppliers

Commodity

producers

Horizontal


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3.1 Horizontal Cooperation: SWOT Analysis

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Strengths Weaknesses

Cost sharing

Efficient allocation of

production

Production flexibility

Costs of coordination

Capital investments may be

necessary

Lack of controlOpportunities Threats

Using of partners Know How

Access to new markets

Customer acquisition

Transition of bad image

Choosing of wrong partner

for long-term cooperation

EU competition rules


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3.2 Horizontal Cooperation: Examples

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Joint Venture

Set up a completely new company

Legally independent

Companies give their resources to the new founded Joint Venture

Example: VW Sharan and Ford Galaxy

Development and production identical

Aim: Cut down costs


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3.2 Horizontal Cooperation: Examples

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Strategic Alliance

Strategic relationship between two or more companies

Join the individual strengths to follow common goals

Concentrated on certain business segments

Example: Star Alliance

Strategic Alliance of 27 Airlines

Coordinate their flights to cut down the travel time of connected flights


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4. Conclusion

Globalization and scare resources require more control over the supply chain

High level of competition requires better cost efficiency

Others drivers are:

Political and trade barriers

Investment barriers

Competition

Enter new markets

Companies internal situation (Financial and labor situation, Know-How, etc.)

Both cooperation and integration are strategic approaches that meet those

global challengesThere is no universal solution: The choice of strategy depends on the

individual situation of a company

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Thank you for your attention

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Bibliography

Beckmann, H. (2004). Supply Chain Management: Strategien und Entwicklungstendenzen in Spitzenunternehmen. Berlin: Springer Verlag.

Becker et al. (2011). Netzwerkmanagement: Mit Kooperation zum Unternehmenserfolg. Berlin: Springer Verlag.

George Von Krogh,Johan Roos (2000). Managing knowledge: perspectives on cooperation and competition

Hertel et al. (2011). Supply-Chain-Management und Warenwirtschaftssysteme im Handel. Berlin: Springer Verlag.

Rderstein R. (2009). Erfolgsfaktoren im Supply Chain Management der DIY-Branche. Wiesbaden: Gabler Verlag

Seuring S. & Goldbach M. (2002). Cost Management in Supply Chains. Heidelberg: Physica-Verlag

Sunil Chopra, S./ Meindl, P (2007): Supply Chain Management. Strategy, Planning, and Operation, Third Edition.

Wannenwetsch, H. (2005). Vernetztes Supply Chain Management: SCM-Integration ber die gesamte Wertschpfungskette. Berlin: Springer

Verlag.

http://www.investopedia.com/terms/v/verticalintegration.asp#axzz1cHvyisYa

http://www.economist.com/node/13396061

http://www.12manage.com/methods_vertical_integration_de.html

http://ig.cs.tu-berlin.de/lehre/w2005/ir1/uebref/NaQuRo-VertikaleIntegrationUndWettbewerb-2005-12-15.pdf

http://www.quickmba.com/strategy/vertical-integration/

http://www.strategy-train.eu/index.php?id=138&L=1

EU Guidelines on horizontal cooperation agreements

http://blogs.hbr.org/hbr/mcgrath/2009/12/vertical-integration-can-work.html

http://www.techiteasy.org/2007/07/28/starbucks-an-example-of-vertical-integration/

http://online.wsj.com/article/SB10001424052748704462704575609733431622088.html

http://www.independent.co.uk/news/business/news/starbucks-to-more-than-double-store-opening-rate-2132888.html

http://www.economics.phil.uni-erlangen.de/bwl/exist_gr/koop.pdf

http://www.wirtschaftslexikon24.net/d/kooperation/kooperation.htm

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vertical and horizontal strategy in scm

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