Let’s Get Vertizontal: Combining Vertical and Horizontal Integration
Nick Ostdick - June 09, 2016
Chocolate or vanilla. Coffee or tea. Comedy or drama. Morning person or evening person.
In today’s larger cultural context, dichotomies have become the norm and a convenient way to break down and sort people, places, and things into easily understood categories. While this often ignores the complexities associated with these kinds of seemingly arbitrary sortings, it also is dangerously reductive and can result in fundamental misunderstandings and misinterpretations which can be damaging later down the road.
For example, isn’t it a bit shortsighted to assume just because someone prefers wine over beer that they’re more sophisticated and cultured? Most people would argue yes and that a person’s beverage preference really has little bearing on how well-mannered or worldly the person actually is.
This same logic can be ascribed to a fiercely contested debate in the automotive supply chain landscape about the differences, advantages, and liabilities of adopting a vertical or horizontal integration strategy to foster the most efficient, cost-effective supply stream.
A number of industry analysts - as well as key players within the industry - believe that companies must select one of these two paths and stick to it - that, much like picking chocolate or vanilla, the question of vertical versus horizontal is a black and white discussion with little room for deviation from either pole.
But in today’s increasingly complex, global supply network, these kinds of extremes are not the brand of value propositions companies should look to leverage in order to remain competitive and gain a strong foothold in the worldwide supply network. In fact, adhering to one strategy over the other without any hybridization is actually a risky proposition that can leave OEMs and production facilities scrambling to rebound from severe disruptions and breakdowns throughout the value chain - not to mention the drain on resources and potential loss of revenue.
So today we’ll be talking a bit about vertizontal integration, or the merging of several aspects of vertical and horizontal strategies to foster a lean supply and production strategy. We’ve discussed in previous entries how the name of the game in today’s automotive manufacturing and supply industry is visibility, transparency, and agility, and we’ll be looking at how vertizontal integration is a core driver in engendering best practices for supply chain efficacy in the 21st Century.
One of the key concerns for planners and mergers today is creating end-to-end visibility (E2E) of manufacturing and supply processes in order to reduce waste and leverage opportunities for growth across the value chain. Slavishly adhering to the principles of vertical integration - greater overall control of the entire value chain with little collaboration between partners and greater risk of disruption because of the dependence on internal production practices, lending to cross-functional silos - would be a giant misstep. However, adopting primarily horizontal integration strategies, which promote less control of the manufacturing and supply chain in favor of third-party vendors or suppliers, would also be a mistake in ensuring the upstream and downstream processes in a planned production facility remain as consistent and timely as possible.
The key, especially given global expansion within the supply stream to include multiple production or warehousing facilities on multiple continents, is to incorporate collaboration with third-party producers, suppliers, and distributors while at the same time optimizing planned production strategies to maintain control in production output. For example, companies would be best advised to implement an optimized BOM solution while then collaborating with a third-party transportation company to ensure the right parts arrive at the right facility at the right time. This hybridization of control and collaboration is key in maintaining planned production schedules and reducing potential bottlenecks or disruptions at the manufacturing and transportation level of the value chain.
The ability to see beyond what everyone sees. The capacity to drill down into specific aspects of the supply processes in order to unearth areas of waste and potential, and leverage each of these into value propositions for growth. But how does vertizontal integration engender greater transparency in the supply stream? Achieving this may fall more into the horizontal camp, but the ability to reduce risk of disruptions or bottlenecks and increase flexibility over efficiency are core drivers in fostering greater transparency. In order to do this, companies must rely on less centralization of planned production and supply - incorporating multiple facilities, various partners, etc - while at the same time utilizing integrated PFEP (Plan for Every Part) principles to understand with greater insight how each part and part family is to be utilized in planned production - which, more or less, is housed firmly in the vertical integration camp.
In variant-rich industries with production and supply hubs located in increasingly disparate parts of the globe, the capacity to adjust, adapt, and rebound to changes and alterations in the production and supply process is a key driver to profitability and productivity. Obtaining this level of agility requires greater communication and collaboration across all touch points of the value chain - a value proposition horizontal integration provides via its reliance on outside vendors in terms of transportation, warehouse and inventory management, and more. But complete supply chain agility is also achieved through walking a fine line between production efficiency - implementing optimized planning and production solutions - and flexibility - maintaining the necessary maneuverability in production and supply to combat modifications in orders, production schedules, and delivery timetables. A truly agile supply chain looks to merge the control and reduced initial capital of vertical integration with the enhanced collaboration and reduced disruption risk of horizontal integration to leverage a value chain capable of weathering the unpredictability and complexities of today’s supply network.
As with so many choices in life - from your ice-cream preference to the genre of movie you want to watch on a Friday night - the choice between vertical and horizontal integration in creating a visible, transparent, and agile supply and manufacturing value stream is not an either/or proposition. Companies that can strike a middle ground of vertizontal integration will not only be better equipped to mitigate the nuances of today’s complex production and supply network, but will also be better suited to tackle future challenges as the industry continues to evolve.
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