The past few years have been brutal for the global supply chain. When the COVID-19 pandemic began, the supply chain as we know it came to a screeching halt.
Companies found themselves struggling to compete for alternative suppliers, and some were forced to stop production completely. Unexpected cold temperatures, the cargo ship blockage in the Suez Canal, and semiconductor shortages disrupted a system that had already been overturned by the pandemic.
However, industry experts will argue that our supply chain was in crisis long before COVID-19. The pandemic simply reinforced the fact that our supply chains are ‘global, dispersed and highly complex.’
If there’s one thing companies can learn from disruption, it’s that the time for geographical diversification and vertical integration is now.
Why Vertical Integration?
Across industries, companies are encountering material shortages that have created major bottlenecks in their supply chains. For months, the global chip shortage has slowed the production of new vehicles and electronics, including laptops, gaming consoles, appliances and smartphones.
A shortage of resins is also causing trouble for the plethora of companies that rely on resin to produce their plastic products. U.S. consumers will likely see a 15 percent increase in the cost of household items such as diapers, trash bags, personal care products, toys, plumbing pipes, and medical devices.
With limited inventory and a surge in demand, companies are facing delayed orders and a slew of impatient, price-sensitive consumers.
Ability to Control the Supply Chain
This is where mergers and acquisitions become increasingly relevant. By acquiring business operations within the same production vertical (vertical integration), companies can control more stages of their production cycle or further control the distribution of their products. Historically, vertical integration has allowed companies to strengthen their supply chains, reduce production costs, capture upstream or downstream profits or access new distribution channels.
But perhaps the biggest opportunity vertical integration creates (in addition to production efficiencies) is the availability and on-time delivery of goods and services.
Today manufacturers must vertically integrate to regain control of their supply chains.
A Lesser Reliance on Suppliers
Since emerging as the manufacturing hub of the world in the 1990s, China has become a critical component of the global supply chain. However, during COVID-19 lockdowns, the Chinese supply of raw and intermediate products decreased. As a result, many manufacturers have been left in short supply, giving new consideration to the idea of onshoring production back to the U.S.
For example, earlier this year, Volkswagen announced plans to build six battery factories in Europe and gain more control of its supply chain. Tesla also announced late last year that it would start producing battery cells for its lithium-ion battery.
While it’s impossible to predict future disruptions in the supply chain, many companies have decided not to leave their supply chains to chance. One strategy for mitigating supply chain risk is to simply bring more of the manufacturing process in house.
Cost Control and Savings
Costs related to the supply chain will account for 30 to 80 percent of sales within most organizations. While not all of these costs can be eliminated outright through vertical integration, many can be greatly reduced.
A good vertical strategy allows companies to control their costs more closely and oftentimes, lower costs for their consumers, creating demand and ultimately increasing the bottom line.
Should You Grow Your Company Through Vertical Integration?
The answer to this question will depend on various factors, including your industry and position in the market. It’s a decision you’ll want to weigh as you also consider your company’s ability to scale and absorb the costs of an acquisition.
However, if your company has been subject to supply chain disruptions throughout the pandemic, vertical integration is an option worth considering.
A professional team that has experience navigating these strategic acquisitions can get you headed in the right direction. Schedule a call with our advisory team. We’ll identify and assess potential opportunities for creating value and minimizing supply chain disruption.
