INTEGRATED SUPPLY CHAIN

You can think of a supply chain as a living, ever-changing organism that is affected by a near-endless
number of factors. Resource scarcity, climate, political and social issues—they can and do affect how
a supply chain functions. When the operations of one segment fails, even briefly, all segments of the
supply chain are affected, and all are susceptible to the disruptions and deviations that result. It’s a
fact that we learned all too well during the COVID-19 pandemic.

But what if a supply chain can become a cohesive unit, a united force of companies that don’t just
depend on each other but actually work together toward a common goal?

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It’s possible through integrated supply chain management (ISCM), a strategy that calls for
streamlining the supply chain process from start to finish and optimizing it using the latest data-
driven insights.

An integrated supply chain is a network of companies with a shared vision. It’s the process of
carrying out coordinated actions to make supply chains more resilient, more diverse, more
efficient, more agile, more flexible, and more responsive to change.

Today’s supply chain management professionals are rarely siloed within their own segment of the
supply chain. Instead, their reach and scope are much broader. They join forces with other segments
to reduce operational costs, minimize risk, and create a healthier, more robust supply chain system
that can quickly adapt to changes in the marketplace.

Supply chain management involves planning, coordinating, and controlling the activities within a
company’s supply chain. In integrated supply chain management, SCM makes a distinct shift from
being an exclusively internal set of processes. By considering all external factors too, managers see
the supply chain as an integrated whole instead of a collection of segmented steps.

In integrated supply chain management, supply chain management is no longer just about the
company; it’s also about other companies, people, resources, and activities within the supply chain.

How to Integrate a Supply Chain: Horizontal Vs. Vertical Integration

ISCM is used as a large-scale business strategy and is usually accomplished through a

merger/acquisition or by creating a centralized operations network, thereby establishing a more
cohesive supply chain system where all supply chain activities and resources are managed more
effectively.

In general, ISCM can be achieved in one of two ways: horizontally and/or vertically. Horizontal
integration involves one company acquiring another company in the same industry that’s similar in
size to increase its market share, while vertical integration involves purchasing companies up and
down the supply chain.

And oftentimes, ISCM is a combination of both horizontal and vertical integration strategies. Take
Andew Carnegie, for example, one of the major industrialists of the late nineteenth century who
spearheaded the expansion of the American steel industry. He implemented both horizontal and
vertical integrated supply chain management to make his fortune. He bought up many companies
that provided raw materials and transportation (e.g., iron mines and railroads companies) to
streamline steel production and acquired many competitors (Pittsburgh Bessemer Steel Works, the
Lucy Furnaces, the Union Mill, and many more) to become the largest and most profitable steel
producer in the world.

Horizontal Supply Chain Integration

Horizontal integration involves the coming together of two or more companies in the supply chain
through a merger or acquisition. In horizontal integration, a company acquires another company in
the same business and at the same level. For example, an electronics manufacturer acquires another
electronics manufacturer to decrease their competition and increase their sales.

You’re Sure to Come Across Examples of Horizontal Integration in the News

From 2006 to 2009 (under CEO Bog Igor’s reign),

the Walt Disney Company acquired 20th Century Fox, Pixar, Marvel, and Lucasfilm. These purchases
aimed to expand the company’s content and entertainment options. And it worked. The Pixar
purchase alone has made the massive Disney conglomerate some $11.5 billion since its acquisition of
the animation company for $7.4 billion in 2006.

In 2016, Marriott International purchased Starwood Hotels & Resorts, thereby creating the world’s
largest hotel company. And in 2015, Kraft Foods and Heinz merged to create one of the largest food
companies in the world. And, of course, you can’t mention horizontal integration without including
the Facebook (now Meta) acquisition of Instagram in 2012. This was a smart move for Facebook, as
Instagram was becoming a large competitive threat at the time. Facebook purchased the platform
for $1 billion. Today, it’s valued at about $102 billion – or more than 100 times what Facebook paid
for it.

Vertical Supply Chain Integration

In vertical supply chain integration, a company acquires another company that’s related to the needs
of their supply chain. For example, an electronics manufacturer may purchase a supplier of
electronics components to give them greater control over the price and the supply of the
components needed to produce their products.

Benefits of vertical integration:

 Better quality control

 Lower costs for end consumers

 The elimination of middlemen

 Increased control of market share

 The elimination of reliance on competitors and suppliers

Vertical integration allows a company to secure partial or total control over the supply chain by
merging with, or acquiring, another company or companies within the supply chain. Vertical
integration may be achieved in one of three ways:

 Forward vertical integration: A company in the supply chain merges with a distribution
channel

 Backward integration: A parent company expanding by purchasing and controlling earlier

stages of the supply chain. For example, a French fry manufacturer may purchase a farm that
produces the potatoes that are used to make their product.

 Balanced integration: A company employs both forward and backward integration to gain
control over their supply chain.
Big names like ExxonMobil, BP, and Shell all utilize vertical integration in their supply chains, thereby
maintaining tight control over their profits. They each have massive exploration divisions that work
to find and secure crude oil. They have their own oilfields and their own oil rigs that extract the
crude oil, and they all have daughter companies and subsidiaries who produce and refine the crude
oil. These companies also have their own retail division that oversees the sale of engine oil, diesel,
and gasoline directly to the consumer.

You also can’t discuss vertical integration without including Amazon. They have their own logistics
service provider and deliver their products without relying on third-party delivery services. They also
stock and sell their own Amazon brands that include in-house brands like Alexa and Amazon Kindle.

Starbucks is a big name that uses a balanced approach to supply chain integration. They own their
own equipment, storage, and roasting facilities while also enjoying direct partnerships with coffee
growers.

How Supply Chain Integration Represents a Sea-Change in SCM and Logistics

Integrated supply chain management creates a

new system that breaks through traditional organizational boundaries and goes straight to the
source. Here communication and information are always on the move and being shared.
Participating companies are bound by a common vision and strategy and look for every opportunity
to eliminate fragmentation.

Integrated supply chain management consists of four components:

 Integrated planning: The planning process becomes one cohesive strategy instead of
multiple strategies that exist as isolated actions. In ICSM, all decisions take into account how
various parts of the supply chain system function in concert with one another, and in
response to what’s happening in other parts of the system.

 Integrated execution: Everything in ICSM becomes a coordinated, synchronized effort. From

procurement to manufacturing to warehousing to transportation, managers think of the
supply chain as an integrated system when taking action.

 Integrated visibility: The integrated supply chain management system is all about visibility
and transparency. Information and data are shared across all segments of the supply chain.
If one segment of the supply chain is disrupted, all segments are alerted, and sound decisions
are made to counter those disruptions.

 Integrated management: Supply chain managers are constantly tracking the performance of
the entire supply chain system and collecting data to achieve and maintain peak operational
performance.
The Risks and Rewards of Integrating a Supply Chain

No surprise here – integrated supply chain management offers a host of benefits:

 Better visibility – ISCM allows businesses to enjoy better visibility of the supply chain
process, which therefore helps them better analyze and observe everything from raw
material sourcing to production to logistics. End-to-end visibility allows companies to remain
more flexible and reactive to changing markets.

 Better efficiency – When the supply chain system integrates, everything becomes more
streamlined, with waste, redundancy, and inefficiency naturally falling by the wayside.
Duplicate vendors and excessive inventory (minimizing the cost of holding stock by increasing
the speed at which the goods flow) can be eliminated.

 Increased customer satisfaction – When goods and services can make their way through the
supply chain in a more efficient manner, the customer benefits in many ways, from more
timely shipments to better quality goods and services to better prices.

 Streamlined product lifecycle – With fewer middlemen and therefore fewer links in the
supply chain, a product’s lifecycle (from the procurement of raw materials to delivery to the
consumer) is sped up and less time is spent between delivery, warehousing, and
transportation.

But this supply chain management strategy isn’t without its challenges. To successfully integrate a
supply chain, companies must consider the cost of integration. While the point of supply chain
integration is to make money and increase customer satisfaction, the upfront costs of integrating can
be substantial.

Investments include new hires, new tools, and additional resources. Integration can become a highly
complex task when it comes time to move to new computer software systems, new technology, and
the cost of training. The cost of integrating a supply chain then becomes a factor, and supply chain
management professionals must make a cost-benefit analysis and consider whether the potential
rewards are worth the cost. It’s not for the faint of heart, but companies willing to embark on the
integration of their supply chain often reap significant rewards.

Integrated Supply Chains are More than Just a Sum of Their Parts

Supply chain integration is more than just a group of companies within the supply chain
acknowledging they have partnerships or relationships. Instead, it’s about an exchange of
information, data, and real-time information at all points in the supply chain.

Supply chain management professionals can facilitate integration by gathering data, including sales
projections, to support their decisions; carefully selecting partner companies; and creating an end-
to-end plan.

The best integrated supply chain systems employ the use of modern technologies like automation,
AI, machine learning, and augmented reality to better understand the supply chain as a whole,
eliminate non-value-added tasks, and restructure supply chain processes as needed. Supply chain
management professionals can view and capture data in real-time. Predictive analytics and data-
driven processes allow companies to identify issues and make quick decisions for everything from
order management to procurement to delivery.
An integrated supply chain involves sharing the same software systems, the same data, and at the
highest level, the same processes. At their best, integrated supply chains behave as segments of one
company, strategically collaborating toward a common goal.

A fully integrated supply chain system allows all partner organizations to share information in areas
like production line planning, inventory management, sales, and order distribution through
warehouse management software and enterprise resource planning systems.

A fully integrated supply chain is one that:

 Creates a shared vision and builds trust

 Shares risks and rewards

 Makes decisions based on shared supply chain considerations

 Implements reliable databases and shares the same IT infrastructure