The Insider – courtesy of Lift & Hoist International magazine.
In the second of a two-part series, Jon Backes, vice president customer experience at The Crosby Group, explores vertically integrated manufacturing from the perspective of a company looking to gain greater control over a supply chain.
This article is primarily targeted at manufacturers or suppliers in a market striving to enhance their standing in a particular sector.
In my first installment, after being motivated by a discussion with distributors, I explored the differences between vertically and non-vertically integrated supply chains. I found there was confusion on this subject among end users, brought on by the lack of transparency with some companies in the lifting and rigging marketplace. I believe this confusion begins with their understanding of the definition of vertically integrated manufacturing.
The term vertically integrated refers to companies that have the highest level of control over the manufacturing supply chain; including source companies and services used in the manufacturing, marketing and distribution of their products. On the contrary, non-integrated, better known as outsourced or private branded, exercise little to no control over major portions of the manufacturing process. With the worst offenders simply stamping their name on the product right before it goes out the door.
There are many reasons why non-vertically integrated companies choose the path of least resistance. Most of those reasons are not for the benefit of the distributor that sells the product and must stand behind it, or the end user that is risking life, limb and load while using the product. Only an elite few companies choose vertical integration, all of which are likely the market leading brands.
Although vertical integration isn’t the only way to bring a product to market; by strategically becoming more vertically integrated a company gains control over their supply chain. This results in higher quality and more flexibility, in terms of scheduling and product development; and, depending on scale, lower costs in the long term for the end user. From the company’s standpoint, among the advantages are the ability to expand the product portfolio quickly, flexibility in pricing, better ROI, and greater control of the direction of your business.
So why isn’t everyone doing it?
That is largely because it takes visionary leadership, an immense amount of planning, resources, and time to go from nothing to forging a high-quality product. Further, it requires significant investment in capital, human resources and a well thought out strategy to execute.
In other words, you need a plant, a hammer, skilled people, materials and new suppliers. All must be led by forward thinking management combined with a team approach to every task. With the right leaders, plan, people and desire, a larger volume of manufacturers can become the embodiment of a vertically integrated supply chain. A successful plan will gain you customer respect, market share and give greater control of your future.
The decision to vertically integrate may be a no-brainer, but the execution is a lengthy and tough process. Once the decision has been made, the next step is to be deliberate and transparent with internal stakeholders, partners and customers. It takes an immense amount of planning and capital to go from a greenfield space to one of highly integrated production.
Vertically integrated vs outsourced or private branding
From the buyer or distributor’s advantage the differences might not be immediately noticeable. But once we look a little deeper, the difference between vertically and non-vertically integrated companies is like night and day.
A vertically integrated company simply has more skin in the game. They control the manufacturing process from start to finish. The process begins with the raw material sourcing, moves to in-house forging, and finishes with controlled distribution.
Additionally, vertically integrated companies know that reputation defines a brand and they work to build and protect the brand in every way possible because each product they sell has their reputation attached to it. Vertically integrated companies demand that the engineering and quality consistency of their product is at the utmost highest level. Every part of the manufacturing process is meticulously reviewed, improved and reviewed again to meet worldwide standards which result in a confident distribution channel that is proud to stand behind the product they sell.
To support their reputation and there by the brand, truly vertically integrated companies will provide certifications with their products stating the product’s provenance right down to the raw materials point of origin. This is part of the transparency I mentioned early in the article.
A company that chooses to buy a product or a distributor that chooses to sell a product must consider how this level of transparency can affect their brand or the life, limb and load of their customer’s employee. This knowledge can help the buyers of lifting and rigging equipment make a better-informed purchasing decision. Plus, if a product fails to meet inspection, there will be no questions as to the origin of the product. With private labeled or outsourced companies this level of transparency is nonexistent, or what information is provided is abbreviated and lacks critical details.
To reiterate, vertical integration requires a great deal of capital to get started, let alone to be successful. It takes investments in the plant, people, equipment, and inventory, alongside determination and commitment to follow through.
Remember, the goal of vertical integration is to achieve complete control of the manufacturing process from raw material to finished goods. If you’re going to gain more control over the supply chain for an existing product or if you’re expanding into a new area it’s a huge leap for a business to take, particularly if your existing practices don’t involve vertically integrated manufacturing at all.
Keeping the primary reasons for vertical integration in mind–generally, vertically integrated companies promote and exemplify an ease of doing business, control of the process, commitment to quality, agility and transparent accountability. If a manufacturer executes well and on time, has flexibility for new or modified product, and is open or promotes on-site visits, one can make a confident assumption about vertical integration.
In conclusion, I hope this article makes you think about where your fittings and hardware come from and whether vertically integrated manufacturing is important to you. Taking risks is part of life, but hopefully being informed and making the right decisions will help lessen the impact if something ever goes wrong.
Vice President Customer Experience
The Crosby Group
Email: [email protected]