A Return to Vertical Integration: Like Dating Your Cousin?

Supply and Demand Chain Executive recently latched on to a PRTM study which examined a number of trends in the manufacturing supply chain and procurement worlds. While the extended survey is most certainly worth looking at if you have the time -- I have not as of yet, but I have always found PRTM's research work worth the effort to look at in detail -- as there are a number of summary elements in SDCE's coverage. One trend that sticks out is how many companies are helping at-risk suppliers. According to the results, "as many as 75 percent of executives say they have helped at-risk suppliers ensure deliveries, and almost half (45 percent) have provided financial support to suppliers in the form of revised payment terms or risk financing". But there's something even more interesting that surfaces elsewhere in the survey results -- a return to vertical integration.

To this end, "The crisis ... is forcing changes to some companies' global footprints. Some executives are questioning recent outsourcing decisions and "in-sourcing" selected activities. This trend is most widely reported by companies in the automotive sector, where 27 percent plan to in-source activities to tighten control over supply chain performance." In other words, companies aren't just pulling spend back onshore from places like China and India -- they're using their own idle facilities (and workers) to produce parts and components which were previously sourced to suppliers. The problem with this is that vertical re-integration is a bit like dating your cousin. Stay with me here for a minute and I'll explain why.

Biologically, there's probably nothing terribly wrong with dating a distant relative. Not that I would ever personally get involved in this sort of behavior, but the true dangers of incest -- as many royal families of the world from a historical context would attest to -- are more direct forms on familial marital relations (i.e., brother/sister relationships). But the problem with these sorts of arrangements is, biologically speaking, they limit the gene pool. They limit our ability to adapt to the world around us. For example, to fight off disease, lower the chance of negative genetic traits and markers getting passed down, etc. In other words, such relationships increase many forms of long-term risk.

The same is true in the case of vertical integration in manufacturing. Put another way, suppliers are like a spouse from a far and away land -- at least in a good relationship. They should bring ideas to the table and innovation that we might not otherwise think of. In other words, a good supplier is a way of mixing up the DNA for our products, lowering risks and increasing the appeal of what we ultimately construct. Vertical re-integration, in most cases, is an internal second marriage of desperation. In the near-term, it's doubtful we'll see many negative symptoms from it. But by the next generation, the ultimate consequences could very well begin to manifest themselves.

Jason Busch

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