Vertical range of manufacture
In our article, we examine vertical integration in industry and look at the advantages and disadvantages of high and low vertical integration - what is the current trend in industry?
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Ivan Keskic
- June 1, 2023
- 17:10
A high vertical range of manufacture refers to the degree of production that a company performs internally compared to the degree of production that is sourced from external suppliers or service providers. If a company carries out many production steps itself and outsources only a few to external suppliers or service providers, it is considered to have a high vertical range of manufacture.
As an example, a company with a high vertical range of manufacture could carry out 80% of its production steps internally and outsource only 20% to external suppliers or service providers. By contrast, a company with a lower vertical range of manufacture of 40% would carry out 40% of the production steps internally and outsource 60% to external suppliers or service providers.
However, it is important to note that the optimal vertical range of manufacture can be different for each company and depends on various factors such as product complexity, costs, demand and market trends. For this reason, companies must carefully consider which production steps should be carried out internally and which should be outsourced to external suppliers or service providers in order to find the optimal vertical range of manufacture for their needs.
Reducing vertical integration is a current trend in the manufacturing industry, driven by concepts such as lean organization and lean production. The aim is for companies to focus their core competencies more strongly by outsourcing certain production steps to suitable suppliers or service providers. This enables companies to reduce costs, minimize risks and respond more quickly to changing market conditions.
However, there are also challenges and risks that must be taken into account when reducing vertical integration. Outsourcing production steps to third parties can lead to an increase in transaction costs, as the demands on procurement and supplier relationship management rise.
It is therefore important that companies carefully consider the cost-benefit trade-off and take into account sourcing requirements and supplier relationships when making make-or-buy decisions (in-house production or external manufacturing) so as not to compromise profitability.
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