Vertical versus horizontal.  That is the question.

vertical vs horix

 

The debate between vertical or horizontal integration of a company’s supply chain is ongoing.

Vertical or horizontal integration is at the heart of a company’s operations strategy.

Which model provides the greatest operating leverage and opportunity for success?  This decision is a fundamental business strategy decision and the answer depends on your company, your unique value proposition and your capabilities and resources to deliver small portions or the majority of that value proposition.

Starting with the Model T and coming off the heels of WW I, a centralized, command and control business and operations strategy began to take hold.  Vertically integrated businesses, leveraging mass-production principles of efficiency, dominated the corporate world until the later part of the 20th century.

In the late 1900s, thinking around horizontal integration began to emerge as a popular trend.  Why own “all” the assets of manufacturing and production, why not partner for some of the components and processes needed to create, produce, distribute, sell and support our product?  Also, why not take advantage of extremely low costs of manual labor in other parts of the world and just ship our final product to points of demand?  This federated (horizontal) approach began to take hold, but with some interesting implications.

Microsoft developed a more horizontal supply chain

Microsoft developed a more horizontal supply chain

In the computer business vertically integrated, mainframe-computer manufacturing gave way to Intel, Microsoft and the client server approach to computing.  Intel and Microsoft are excellent examples of companies who introduced disintermediation into the computing paradigm and decided to carve out their niche (very strategically it proved) in the computing value chain.  These companies began to help their value chains compete (and win) against the

So, this is what we are seeing as we near the end of 2012.  We see companies embracing both models.  Korean Samsung as a fully, vertically integrated company (yes – they have received plenty of government subsidies over the years); and Intel, very much a horizontally integrated company who leverages OEMs and their distribution channels to take their products to market.  These two opposing models have a completely different mindset from one another and completely different consequences.

It is even possible for an organization to have both or hybrid structures at any point in time. This could happen in different divisions or in certain parts of the company.

 

Bottom line there is no right answer, but more importantly, the structure must reflect the current reality and this is often the real reason organizations change.

 

What’s best for your supply chain: vertical or horizontal?