What Is Supply Chain Integration?
Supply chain integration is a close alignment and coordination within a supply chain, often with the use of shared management information systems. A supply chain is made up of all parties involved in fulfilling a purchase, including raw materials, manufacturing the product, transporting completed items and supporting services.
Supply chain refers to all inputs required to produce a product and fulfill a purchase. For example, a company that assembles computers would need to purchase components such as circuit boards. The circuit board company would need to purchase materials to produce them, including wire and silicon. All of these materials and components form part of the company’s supply chain of materials needed to produce the end result of a working computer. Once the computer is built, a trucking company may take it to a wholesaler warehouse, and then it may be delivered to a retail store for sale or shipped directly to an end user. Every step – from sourcing of raw materials to final delivery to the customer – is considered part of the supply chain of the computer.
How Do Companies Integrate Supply Chains?
There are several different levels of supply chain integration. Generally, the first step in integration would be to select specific vendors to provide specific inputs, and develop an agreement for them to provide a set amount of inputs during the year at a set cost. This ensures the company has the materials it needs to produce its expected output of computers during the year. Our computer company might sign a contract with a large supplier of circuit boards, for example, that requires it to deliver a specific quantity at specific times during the year and sets a price that will be in effect during the contract.
A higher level would be to integrate the companies more closely. The circuit board provider might build a plant close to our assembly plant, and we might share production software so the circuit board company can see how many boards we’ll need in the upcoming week and can build them as we need them to meet sales demand.
An even higher level is called vertical integration, which is when the supply chain of a company is actually owned by the company. For example, our computer company could purchase a circuit board company in order to ensure a dedicated supply of components.
The Advantages of Integration
Some of the primary advantages of supply chain integration are:
Inventory Management – Close alignment with input providers means that a company can order materials to be delivered as needed, rather than purchasing large quantities that then need to be managed and stored.
Known Costs – Since the company will use a specific supplier for a specific material, long-range contracts can be drawn up which set the price of the item. This fixed cost of input makes it easier for the company to set a selling price for its item that guarantees profitability for the company.
Guaranteed Customer – A company in an integrated supply chain is producing its products to fill a need in the chain and will send them on to the next company in the chain once they are produced. This means the company will not have much finished goods inventory sitting in its warehouse, since it’s building to fill open orders.
The Disadvantages of Integration
There are also some disadvantages of supply chain integration, including:
Set Prices – Companies often develop a close relationship with a specific supplier for a specific input needed for their products, and create a long-range contract with defined pricing. This means that the company cannot take advantage of short-term price decreases, perhaps due to surpluses in the industry or a new entrant trying to gain market share.
Limited Customers – A company in an integrated supply chain will generally be focused on meeting the needs of the next company in the process and may have limited sales outside the defined supply chain. If, for example, the end of a particular supply chain is customers shopping at a large retailer, and that company has a decline in demand for the product, it can impact all suppliers in the supply chain.
Let’s review. Supply chain integration is a close alignment and coordination within a supply chain. A supply chain refers to everything required to produce a product from raw materials, to manufacturing, shipping and support services. There are several levels of integration. One of the highest levels of integration is known as vertical integration, which is when the supply chain of a company is actually owned by the company. Advantages of supply chain integration include inventory management, known costs and guaranteed customers. Disadvantages of supply chain integration include set prices and limited customers.
Supply Chain Integration Overview
|Supply chain integration||a close alignment and coordination within a supply chain, often with the use of shared management information systems|
|Vertical integration||when the supply chain of a company is actually owned by the company|
When this lesson concludes, you should know how to:
- Explain supply chain integration
- Identify a characteristic of vertical integration
- Describe the advantages and disadvantages of supply chain integration