Vertical integration has frequently appeared on the agenda of corporate board meetings as a consideration of dealing with the prospect of current supply chain disruptions becoming more the norm than a COVID-induced apparition. 

Trying to offset supply chain issues via vertical integration may prove a viable choice in some minimal cases. However, in most instances, the issues currently being confronted in supply chains are reflections of a lack of depth in supply chain planning, which commonly focuses only on near-term, surface considerations, and the poor decisions regarding the purchase and application of supply chain management (SCM) software, as well as the selection of and relationships with logistics service providers.

Still, without specifically addressing strategic SCM discussions in active consideration by clients, I can verify that some modified version of vertical integration is being widely considered by companies, although the realities of such tend to demand some reticence. 

Henry Ford was a bright guy, but making the capital investment in steel production was a disaster. And then there are the management school LTV case studies still spotlighting Jimmy Ling’s revelation that trying to manage diverse activities in which one does not have expertise ultimately leads to them all suffering and the largest bankruptcy of an era. 

Despite my position coach’s periodic pronouncements to the contrary, I was a pretty decent college defensive end. However, I had neither the skill set nor the comprehension to function at safety, even though it was still just defense. Contrary to some popular belief, management is not just management. 

Possibly one of the smartest moves that Jeff Bezos ever made was acquiring Kiva. In doing so, he was committing Kiva’s total capacity and ongoing capacity growth to the ever-expanding robotics needs of the flourishing Amazon distribution operation. In that instance, there was no basis for external customer conflict over preferential treatment.

Companies looking to a possible acquisition of suppliers that produce components of any significant scope, beyond the buyer’s production requirements, will find themself in a business with which they are not particularly expert. They will potentially face draconian decisions relative to selling that excess production (necessary for efficient production), with the likelihood that the external market will include direct competitors. 

Acquiring a smaller vendor with production capacity that the buying firm can fully absorb is a move several firms are currently considering. Those kinds of purchases appear to be the most likely to become common transactions, primarily based on equity and employment contracts with cash incentives, each tying that entity’s management to the ongoing operation, with altered titles. Effectively, this would add another element to the normal manufacturing cycle, most likely improve sourcing cost, provide for reduced logistics expenditures (while lending increased service provider volume leverage), and allow for component modifications pretty much on-demand. I can state for a fact that this is something we will see with some frequency.

Capital investment in entirely new component production, although being discussed, is not being viewed with great favor. In other times, this would seem the best route. Start fresh, without in the process effectively buying somebody else’s problems.

With components that can realistically be produced in sufficient quantity to prove cost-efficient, investment in new production is the path that we are likely to see emerge as more commonplace later in the decade. This will be particularly true as access to production equipment becomes more readily available than it is right now (with machine tool production near a record high) and as the cost of construction moderates. (It’s not going to go down.)

However, there is one glaring obstacle that currently impacts existing production capacity: Skilled labor is at a premium and is likely to continue to be a primary governor on the engine of production.

However, one glaring obstacle currently impacts existing production capacity: Skilled labor is at a premium and is likely to continue to be a primary governor on the engine of production.

Nearly every senior executive with whom I have spoken in the last several months is singing the same refrain: unless we make a significant national commitment to substantially expanding training of a workforce capable of functioning in today’s and tomorrow’s production environments, particularly engineering and trade skills, economic expansion will slow to a crawl. 

Building new plants and installing new equipment will make no sense if there is no one to operate that equipment. Employee loyalty and operational continuity have proven tough to retain in the recent past. When the basic economics of supply and demand come to bear in a tight skilled-labor market, everyone sees herself as a free agent. And that is the biggest obstacle to vertical integration.

After World War II and the Great Depression, an educated workforce and an advanced infrastructure catapulted the U.S. economy into a lead that was not overtaken for eight decades. Nowhere was that more true than in the manufacturing powerhouse that was our commonwealth of Pennsylvania. Yet,  both state and federal legislatures seem bent on cutting, not expanding on, education and training expenditures, the very factors that would support corporate manufacturing commitments, onshoring, and enhanced SCM control.

Chuck Franzetta is CEO of Franzetta & Associates. Since 1981 he has provided SCM consultation, marketing assistance, training, and SCM talent recruitment in diverse industries. He is also chair of the editorial board of TheProfitChain.com.

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