Vertical integration is a business situation where a company expands by acquiring its suppliers or its customers, thus controlling all the different processes like production, raw materials and sales of finished products. In supply chain management vertical integration describes a style of management control where in the different components of the supply chain is united through a common owner. Though these products are different and diverse these combine to cater to the common objective of the company. by carrying out the production and distribution processes under the same roof, the business entities can tide over the common problems like delay and hold ups , which could cost them very dearly.

The concept of vertical integration was developed by the Nineteenth century steel tycoon Andrew Carnegie which became a huge success. This prompted other business people to follow the vertical integration model to ensure financial growth and efficiency. Thus in vertical integration, a firm owns its downstream suppliers and its upstream buyers unlike horizontal integration, where different firms handle different functions. As vertical integration involves only one firm engaged in different parts of production, it ensures better coordination and excellence. For instance oil companies are examples of vertical integration where the company owns the oil rig, produces oil and transport to the various outlets all over the country.

There are three types of vertical integration namely upstream, downstream and balanced (both upstream and downstream) vertical integration. Backward vertical integration is the one in which the controls subsidiaries that produce some of the products that are used in the production cycle. By owning these subsidiaries, the company can ensure a steady supply of premium quality materials, which in turn would have bearing on the quality in their final product.

Before opting for Vertical integration, make sure that the cost of internal production is less than the rate incurred while outsourcing the production to different units outside. There are many advantages for vertical integration. It will improve the supply chain coordination, will reduce transportation costs and ensure better transparency in operations. In the case of companies dealing in monopoly products, vertical integration will be a potent move to cut off competition. However the downside of vertical integration is that the company might lack expertise to handle the various supply chain management steps. There are many authentic sources of information on this subject including Cambridge encyclopedia.

Author's Bio: 

Vertical integration is a complex process in any supply chain management and to know the latest trends in vertical integration, Cambridge encyclopedia will be a good choice.