Vertical Integration: Supplier Visibility Heads "Back to the Future"

Posted At : November 30, 2009 1:07 PM
Related Categories: William Busch

According to Wikipedia "Nineteenth century steel tycoon Andrew Carnegie introduced the idea of vertical integration. This led other businesspeople to use the system to promote better financial growth and efficiency in their companies and businesses." It is essentially the practice of controlling as many factors of production as possible in the overall supply chain that give rise to a product or service. With the recession induced increased need for supplier visibility, it is perhaps not surprising that many large corporations are (re)turning their attention to this pillar of the industrial revolution.

This morning's WSJ reports that "Larry Ellison, the billionaire chief executive of software maker Oracle Corp. ... known for forward thinking ... is taking a page from the past ... with his new business model [planning] to buy Sun Microsystems Inc. and transform Oracle into a maker of software, computers, and computer components -- a company more like the U.S. conglomerates of the 1960s than the fragmented technology industry of recent years." The column quotes "Harold Sirkin, global head of the Boston Consulting Group's operations practice [saying] 'The pendulum has shifted from disintegration to integration' ... He attributes the change to volatile commodity prices, financial pressures at suppliers and quests for new revenue -- challenges exacerbated by the recession."

The Journal states that "Mr. Ellison is betting that the combination will appeal to corporate customers tired of assembling technology from multiple vendors" and sums up this contemporary back shift best in quoting Mr. Ellison from an event in October where he said "We weren't in the hardware business, now we're diving in with both feet ... We're really brilliant, or we're idiots."

- William Busch

Posted By : Administrator | Comments (2) | Send | del.icio.us | Linking Blogs

Comments

[Add Comment]

There are so many themes from this WSJ article with key spend management overtones....from supplier visibility (e.g. will my supplier still be financially viable) to supply assurance (e.g. I can't be on allocation) to the need to smooth out price volatility for raw materials in recent years, to supplier quality and performance problems with an outsourced global supply base to global macro-economic factors such as currency and wage appreciation make this a fascinating "new/old" strategy many companies across every part of the supply chain are considering. We'll take a metals angle on this tomorrow!

# Posted By Lisa Reisman | 11/30/09 2:59 PM

I find the vertical integration rally incongruent with the broader market emphasis on lean operations and agility. CFOs are looking to maintain lean operations and drive productivity improvements. It's true that volatility is becoming the norm -- whether in terms of demand or commodity prices and availability. Yet, the primary goal is to be able to detect and adapt quickly to respond to this volatility -- not to take on burden of additional fixed cost structures by owning more assets, resources, and components of the supply chain.

In fact, new research from Hackett Group finds that "Enterprise agility is becoming a strategic capability." http://www.ariba.com/resourcelibrary/views/resourc...

I am very dubious that vertical integration is the answer to volatility. New service delivery models that rely more on the right mix of supply chain partners (and outsourced providers) that can be ramped up as needed and dialed down as the market changes.

Here's more from the agility camp: http://www.businessweek.com/magazine/content/09_38...

# Posted By Tim Minahan | 12/1/09 7:47 AM

[Add Comment]

Sun

Mon

Tue

Wed

Thu

Fri

Sat