Supply Chain Management // Prof. Dr. Wollny
Vertical and horizontal cooperation in aSupply Chain
November, 9th 2011
Supply Chain Management: Strategic Issues
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Agenda
1. Introduction2. Vertical Cooperation3. Horizontal Cooperation4. Conclusion
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1. Introduction: Development of Value Chains
cf. Seuring & Goldbach (2002)
“Business cooperation is generally a collaboration between mostly few juridically and economically independent companies to raise the common competitiveness”
Becker et al. (2011)
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1. Introduction: Development of Value Chains – Triggers for rising cooperation in SC
• Increasing competition• Increased customer requirements due to the development from seller‘s to buyer‘s
market (push pull)• Cost reduction and efficiency potentials are stronger in processes than in products• Outsourcing of operations with little strategic importance in order to concentrate
on own core competences• Lack of own (financial) resources• Bullwhip Effect• Modern technologies allow efficient networking between companies
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1. Introduction: Objectives of cooperation
• Improving costs, productivity and flexibility• Meeting the customer expectations• Generating synergies
– Pooling the resources– Sharing specific strengths and capabilities– Sharing Know-How– Gaining an effective governance (only cooperation with centralized management)
• Gaining of stability and sustainability of supply chains
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1. Introduction: Forms and fields of cooperation
Attributes Characteristics
Direction horizontal vertical diagonal
Expansion local regional national global
Duration temporary unlimited
Fields of cooperation
R&D distribution purchasing marketing production
Forms of cooperation:•Service Agreements•Joint Ventures
•Cooperatives•Consortia
•Cooperative Agreements•Licensing
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2. Vertical Cooperation
• Companies of different stages of the value chain are working together
• Aim: Gain a benefit out of the cooperation
• Cooperating companies stay legally and economically independent
• Can be limited to a part of business of a company
• Cooperation are often limited in time
• Types of cooperation– Forward cooperation: working together with companies closer to the final customer– Backward cooperation: working together with companies in the direction of
procurement
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2. Vertical Cooperation
Vertical
Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity producers
Forward
Backward
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2.1 Vertical Cooperation: Alternatives
Vertical Integration
• “When a company expands its business into areas that are at different points of the same production path”
• Types of integration– Forward integration: Acquisition of activities closer to the final customer– Backward integration: Acquisition of activities in the direction of procurement
• Important factors: costs and control• The level of vertical integration depends on the relations with suppliers (form of
cooperation, type of contract)
• Goal: Achieving the optimal vertical integration
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2.2 Vertical Cooperation vs. Integration
Common Advantages• Improve supply chain coordination (reduced Bullwhip effect)• Higher control over inputs and the whole Value Chain• Increase entry barriers to potential competitors
Integration• Reduce transportation costs• Participate upstream or downstream
profit margins• Lead to expansion of core competencies• Decreased flexibility
Cooperation• The company remains independent and
therefore flexible• Easy exit of cooperation• No high capital investments required• Risk of Know-How outflow• High dependency on strong partners
Common Disadvantages• Higher coordination costs• Lack of supplier competition higher costs, less efficient
Differences
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2.3 Vertical Cooperation: Example
Vertical Cooperation: Toyota
• Supplier Organization (Level of responsibility)– 1st Tier Supplier: In depth relation ship to Toyota– 2nd Tier Supplier: Produce individual parts
• Scale of Cooperation– Product development teams– Cross-sharing of Personal (Workers and Mangers are exchanged)– Sophisticated communication between Toyota and Suppliers– Suppliers are Partners– Build up and training of suppliers – Focus on long term relationship
• SCM Concepts in use– Kaizen– JiT
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2.3 Vertical Cooperation: Example
Advantages for Toyota
• Integrated system (JiT)• High quality• Shared development costs• Cost reduction• Secured supply• High influence on suppliers
Advantages for Suppliers
• Economies of scale• Constant orders• Know-How transfer• Shared development costs• Shared financing • Not easily replaceable
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2.4 Vertical Integration: Example
Vertical Integration: Starbucks
• Overview– Biggest Coffee House Company in the world– About 17,000 Stores in over 50 countries– Mission: To supply the customer with “...the finest coffee in the world...“
• Past strategy:– Buy beans from Suppliers, ensuring quality via high price (incentive) and quality control– Bean Roasting fully integrated into the Supply Chain, to grant top quality coffee
• New strategy – Complete backward integration – Purchase of a coffee-bean farm in china– Training and educating employees – Ensure quality with own farms and Know-How
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2.4 Vertical Integration: Example
• Reasons for Starbucks decision– Opening of the Chinese Market and the continues rapid growth– Limited supply of high quality Arabica beans– Increasing prices (+50% in price for Arabica beans)– Direct control of quality in all stages of production– Ability to maintain perfect quality through-out the whole value chain– Ability to control the full customer experience– Control of the moral hazard issue (bad reputation of coffee production)
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3. Horizontal Cooperation
• Two companies of the same industry and in the same stage of production work together
• These companies belong to the same supply chain stage and normally produce or trade the same products
• Firms add their strength to gain benefits
• Affects the processes and structure design of distribution networks
• Cooperation creates a change of existing hubs
• Requires inter-firm coordination
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3. Horizontal Cooperation
Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity producers
Horizontal
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3.1 Horizontal Cooperation: SWOT Analysis
Strengths Weaknesses
• Cost sharing• Efficient allocation of production• Production flexibility
• Costs of coordination• Capital investments may be necessary• Lack of control
Opportunities Threats
• Using of partners‘ Know How• Access to new markets• Customer acquisition
• Transition of bad image• Choosing of „wrong“ partner for long-term cooperation• EU competition rules
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3.2 Horizontal Cooperation: Examples
Joint Venture
• Set up a completely new company
• Legally independent
• Companies give their resources to the new founded Joint Venture
• Example: VW Sharan and Ford Galaxy
• Development and production identical
• Aim: Cut down costs
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3.2 Horizontal Cooperation: Examples
Strategic Alliance
• Strategic relationship between two or more companies
• Join the individual strengths to follow common goals
• Concentrated on certain business segments
• Example: Star Alliance
• Strategic Alliance of 27 Airlines
• Coordinate their flights to cut down the travel time of connected flights
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4. Conclusion
• Globalization and scare resources require more control over the supply chain• High level of competition requires better cost efficiency• Others drivers are:
– Political and trade barriers– Investment barriers– Competition– Enter new markets– Companies internal situation (Financial and labor situation, Know-How, etc.)
Both cooperation and integration are strategic approaches that meet those global challenges
There is no universal solution: The choice of strategy depends on the individual situation of a company
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Thank you for your attention
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Bibliography
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