Many companies are always torn when it comes to choosing whether to deal with external suppliers and integrate vertically and supply the materials they need and produce on their own, as argued by Chopra and Meindi (2005). Each of the two methods has its benefits and shortcomings.
Importance Of Going With External Suppliers
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Customer accommodation
Many external suppliers are flexible and quite accommodating when it comes to their long-term business partners. The company can always rely on them even when it is not financially. The excellent relationship between the two creates trust that can last long when well maintained.
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Provision of a broader market.
The external suppliers have many outlets and connections. Therefore, involving them will automatically expand the whole market. Thus, the company is in a position to make more profits as compared to when they could have done the marketing and selling on their own. The suppliers are able to provide high-quality materials needed at reasonable prices.
Disadvantages Of External Suppliers
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Managing product material problems.
This can bring about s major breakdown in the company’s checks and balances. In case of any changes in the market, the company may not be in the know-how as the suppliers control all their systems that monitor such information. There is no direct involvement between the company and its consumers and customers.
Vertically Integrating Your Supply Chain As A Company
The firm may opt to shift from involving external suppliers to vertical integration, where they control many stages of their supply chain, according to Frazelle (2002). These range from production to selling of their products.
Advantages Of Vertical Integration
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Gives companies economies of scale
The company has the power to cut costs in all its dealings. This can be done by buying goods in bulk, which will eventually reduce the cost of production per unit. The firm is also able to make its own effective decisions during the whole manufacturing and selling process, which can increase its sales. The company is also able to maintain constant profit margins while running the business.
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Direct involvement with the customers.
The company has the privilege of involving its customers in the running of the business. In case of any misunderstandings, it is easily solved, and the mutual relationship between the two is always maintained. The company has full control of their market and can control its competition levels Lau and Lee (2000).
Disadvantages Of Vertical Integration
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The increased cost of running the business
Vertical integration comes hand in hand with increased investments as the company must employ quailed personnel to monitor all the processes of the chain supply. Learning the market trends is also costly and requires a great deal of capital to run everything successfully compared to when there were external suppliers involved.
It is easier to continue with external suppliers. With the cause of managing the supply chain having been discovered, it is easier to correct the mistakes rather than change to a whole new process at a go. The new manager should aim to repair the broken relationship between the suppliers and the company. Trying out with new suppliers who will be able to supply on time as well as provide high-quality materials. According to Wong (2008) companies that have opted to shift from external suppliers to vertical integration have confessed it is not easy to adapt to the changes involved, therefore, sticking to foreign suppliers will be the best recommendation in this case.
References
Chopra, S., & Meindl, P. (2015). Supply Chain Management: Strategy, Planning, and
Operation (6th ed.).
Frazelle, H. (2002). Supply Chain Strategy: The Logistics of Supply Chain
Management. McGraw Hill Professional.
Lau, C. ., & Lee, W. (2000). On a responsive supply chain information system.
International Journal of Physical Distribution & Logistics Management, 30(7/8).
Wong, K. (2008). A review of benchmarking of supply chain performance
measures. Benchmarking: An International Journal, 15(1).
