In microeconomics, management and international political economy, vertical integration, also referred to as vertical consolidation, is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.[1] It contrasts with horizontal integration, wherein a company produces several items that are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership but also into one corporation (as in the 1920s when the Ford River Rouge Complex began making much of its own steel rather than buying it from suppliers).
Vertical integration can be desirable because it secures supplies needed by the firm to produce its product and the market needed to sell the product, but it can become undesirable when a firm's actions become anti-competitive and impede free competition in an open marketplace. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly: vertical in a supply chain measures a firm's distance from the final consumers; for example, a firm that sells directly to the consumers has a vertical position of 0, a firm that supplies to this firm has a vertical position of 1, and so on.[2]
Vertical expansion
Vertical integration is often closely associated with vertical expansion which, in economics, is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. A firm may desire such expansion to secure the supplies needed by the firm to produce its product and the market needed to sell the product. Such expansion can become undesirable from a system-wide perspective when it becomes anti-competitive and impede free competition in an open marketplace.
The result is a more efficient business with lower costs and more profits. On the undesirable side, when vertical expansion leads toward monopolistic control of a product or service then regulative action may be required to rectify anti-competitive behavior. Related to vertical expansion is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale.
Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase sales and to gain market power. The acquisition of DirecTV by News Corporation is an example of forwarding vertical expansion or acquisition. DirecTV is a satellite TV company through which News Corporation can distribute more of its media content: news, movies, and television shows. The acquisition of NBC by Comcast is an example of backward vertical integration. For example, in the United States, protecting the public from communications monopolies that can be built in this way is one of the missions of the Federal Communications Commission.
Scholars' findings suggest that a reduction in inefficiencies caused by the market vertical value chains, including downstream prices or double mark-up, can be negated with vertical integration. Application in more complex environments can help firms overcome market failures (markets with high transaction costs or assets specificities) Scholars also identified potential risks and boundaries which may occur under vertical integration. This includes the potential competitor, the enhancements to horizontal collusion, and development of barriers to entry. However, it is still debated over if vertical integration expected efficiencies can lead to competitive harm to the market. Some conclude that in many cases that the efficiencies outweigh the potential risks.[3]
Three types of vertical integration
Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g., growing raw materials, manufacturing, transporting, marketing, and/or retailing). Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. The differences depend on where the firm is placed in the order of the supply chain. There are three varieties of vertical integration: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.
Distinguish between backward integration, forward integration and balanced integration
Backward vertical integration: A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by integrating the production of cars and car parts, as exemplified in the Ford River Rouge Complex. This type of integration also makes the barriers to entry into an industry more difficult. The control of subsidiaries that produce the raw materials needed in the production process gives a company the power to refuse access to resources to competitors and new entrants. They have the ability to cut off the chain of supply for competing buyers and thus, strengthen their position in their respective industry.[4]
Forward vertical integration: A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold. An example is a brewing company that owns and controls a number of bars or pubs. Unlike backward vertical integration, which serves to reduce costs of production, forward vertical integration allows a company to decrease its costs of distribution. This includes avoiding paying taxes for exchanges between stages in the chain of production, bypassing other price regulations, and removing the need for intermediary markets. In addition, a company has the power to refuse to support sales of competing distribution centers and retailers. Similar to backward vertical integration, this ability increases the barriers to entry into an industry.[4]
Balanced vertical integration: A company demonstrates balanced vertical integration when it practices both backward vertical integration and forward vertical integration. Accomplishing this gives a company authority over the entire production and distribution process of a given product. A product that is produced in an integrated company as such exemplifies the result of a cost-efficient manufacture
Disintermediation is a form of vertical integration when purchasing departments take over the former role of wholesalers to source products.[5]
For vertical integration to succeed, managers must be able to adapt their managerial approach to compliment the changes in functional activities that their vertical shift accompanies. Managers should make sure that their firm can take advantage of existing functional knowledge through organisation, and simultaneously allow new functional knowledge to develop. However, environmental possibilities can be a factor in determining whether vertical integration is successful.[6]
Influence factors of vertical integration
Technology: the probability of vertical integration between the two industries is less likely when the supply industry is more technology-intensive and the production industry is less technology-intensive. In addition, the impact of these factors is greater when inputs from the supply industry represent a large proportion of the total costs incurred by the production industry.[7]
Switching cost and product differentiation: based on a new insight that pricing incentive choice of a downstream producer may change by vertical integration, downstream firms are more likely to switch to a different supplier if the investment by firms in a particular relationship is low, or if the input market is similar to the spot market. In this case, vertical M&A is more likely to have a positive impact on consumers. However, if supplier switching costs are high, the impact of a vertical integration on consumers depends on the degree of downstream product differentiation. If the downstream product is significantly differentiated, vertical integration is more likely beneficial to consumers. In contrast, if the downstream products are close substitutes, vertical integration is likely to harm consumers.[8]
Problems and benefits
There are many problems and benefits that vertical integration brings to an economic system. Problems that can stem from vertical integration can include large capital investments needed to set up and buy factories and maintain efficient profits. Rapid technology development can increase integration difficulties and further increase costs. The requirement of different business skills venturing into new portions of the supply chain can be challenging for the firm.[9] Another problem that may stem from vertical integration is the collapse of goals among the various firms in a supply chain. With each firm operating under different systems, integration may cause initial problems in management and production.[10] Vertical integration also proves to be dangerous when monopolistic problems arise in a capitalistic economy. When this happens, competition is removed and a corporation has the power to control all firms in its supply chain.[11]
One benefit is that the implementation of vertical integration can yield increased profit margins or eliminate the leverage that other firms or buyers may have over the firm.[12] It allows improved coordination between production and distribution firms and decreases the cost of exchange of goods between firms within a supply chain.[10] Operational routines also become more consistent and certain as the management of these firms gradually merge.[10] Vertically integrated firms rarely need to worry about the sufficiency in their supply of materials because they generally control the facilities that provide them.[13] A vertically integrated company also creates high barriers of entry into their respective economy, eliminating most potential competition.[13] Implementing vertical integration can be beneficial in that it reduces the distance that separates the suppliers and customers from the resources or information, which can then boost profits and efficiency.[14]
There are internal and external society-wide gains and losses stemming from vertical integration, which vary according to the state of technology in the industries involved, roughly corresponding to the stages of the industry lifecycle.[clarification needed][citation needed] Static technology represents the simplest case, where the gains and losses have been studied extensively.[citation needed] A vertically integrated company usually fails when transactions within the market are too risky or the contracts to support these risks are too costly to administer, such as frequent transactions and a small number of buyers and sellers.
Strategic independence (especially if important inputs are rare or highly volatile in price, such as rare-earth metals).
Enhancing the company's ties with its suppliers [14]
Lower the threshold for entry. A sustained high surplus phase must be protected by barriers to entry. As a result, a vertically integrated entrant is able to extend these barriers at a lower cost than the value of existing surpluses.[15]
Internal losses
Higher monetary and organizational costs of switching to other suppliers/buyers
Weaker motivation for good performance at the start of the supply chain since sales are guaranteed and poor quality may be blended into other inputs at later manufacturing stages
Specific investment, capacity balancing issue
Developing new business competencies can compromise on existing competencies
Conflicts in inventory management post-integration[10]
Demand uncertainty may increase due to inventory instability[10]
Assigning limited purchasing resources among the suppliers as well as the production of goods or services [14]
Benefits to society
Better opportunities for investment growth through reduced uncertainty[citation needed]
Local companies are often better positioned against foreign competition[citation needed]
Manipulation of prices (if market power is established)
Loss of tax revenue as fewer intermediary transactions are made.[citation needed]
Selected examples
The following are several case studies of vertical integration in play. Many examples center around American industries, where major companies like General Foods, Carnegie Steel Company, the Bell System, Apple, the U.S. entertainment studios, the U.S. meat industry, Ford Motor Company, CVS, and Amazon demonstrate vertical merging. Other examples like Alibaba and EssilorLuxottica cover vertical integration in other nations.
During a hunting trip American explorer and scientist Clarence Birdseye discovered the beneficial effects of "quick-freezing". For example, fish caught a few days previously that were kept in ice remained in perfect condition.
In 1924, Clarence Birdseye patented the "Birdseye Plate Froster" and established the General Seafood Corporation. In 1929, Birdseye's company and the patent were bought by Postum Cereals and Goldman Sachs Trading Corporation. It was later known as General Foods. They kept the Birdseye name, which was split into two words (Birds eye) for use as a trademark. Birdseye was paid $20 million for the patents and $2 million for the assets.
Birds Eye was one of the pioneers in the frozen food industry. During these times, there was not a well-developed infrastructure to produce and sell frozen foods. Hence Birds Eye developed its own system by using vertical integration. Members of the supply chain, such as farmers and small food retailers, could not afford the high cost of equipment, so Birdseye provided it to them.
Until now, Birds Eye has faded slowly[citation needed] because they have fixed costs associated with vertical integration, such as property, plants, and equipment that cannot be reduced significantly when production needs decrease. The Birds Eye company used vertical integration to create a larger organization structure with more levels of command. This produced a slower information processing rate, with the side effect of making the company so slow that it could not react quickly. Birds Eye did not take advantage of the growth of supermarkets until ten years after the competition did. The already-developed infrastructure did not allow Birdseye to quickly react to market changes.
In order to increase profits and gain more market share, Alibaba, a China-based company, has implemented vertical integration deepening its company holdings to more than the e-commerce platform. Alibaba has built its leadership in the market by gradually acquiring complementary companies in a variety of industries including delivery and payments.
Steel and oil
One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. The company controlled not only the mills where the steel was made, but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc. The company focused heavily on developing talent internally from the bottom up, rather than importing it from other companies.[17][full citation needed] Later, Carnegie established an institute of higher learning to teach the steel processes to the next generation.
Oil companies, both multinational (such as ExxonMobil, Shell, ConocoPhillips or BP) and national (e.g., Petronas) often adopt a vertically integrated structure, meaning that they are active along the entire supply chain from locating deposits, drilling and extracting crude oil, transporting it around the world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to company-owned retail stations, for sale to consumers.[citation needed]Standard Oil is a famous example of both horizontal and vertical integration, combining extraction, transport, refinement, wholesale distribution, and retail sales at company-owned gas stations.
Telecommunications and computing
Telephone companies in most of the 20th century, especially the largest (the Bell System) were integrated, making their own telephones, telephone cables, telephone exchange equipment and other supplies.[18] The Bell System is an example of an industry in which without vertical integration, would not be able to develop efficiently. In order to implement a telecommunications system that connected cities across a nation reliably, vertical integration was called upon. This strategic move ensured that the wiring, manufacture, and management of the system was consistent and functional across a state.[19]
Apple
Apple has used the vertical integration strategy for 35 years and is one of the most successful companies in the technology industry. Apple centered its business strategy on its own development of integrated hardware, software, and latterly services. They design most of their products in-house, and do not allow their hardware and operating system to be licensed out, which allows the company to apply its company vision to its products.
Large companies such as Apple are more likely than smaller companies to employ vertical integration, as they have more resources to manage each stage of production (e.g. major expansion and funding). Implementing a vertically integrated strategy has helped Apple become a leading platform company; integrating their software (through APIs for third-party application developers) with their own hardware, across all the devices and services they offer.
Vertical integration allows Apple to control production from beginning to end. Other companies may follow the Apple model, but may not see success for some time, both due to the cost of entering the market and taking on the currently successful incumbent, but also by innovating their products to make them more appealing in the marketplace than the current incumbent. Vertical integration requires a company to focus not only on its core business, but also on several difficult areas such as sourcing materials and manufacturing partners, distribution, and finally selling the product.
Another major success of Apple's, is the forward integration with their retail stores, allowing them to sell their products directly to customers (helping customers to buy and use Apple's products and services), additionally helping them to control the prices of their products, and thus to maintain high-profit margins when they do.[20] Apple is also known as one of the world's leading "orchestrators" as they exert control over the entire value chain, but do not do everything in-house (e.g. assembly of iPhones by manufacturing partner Foxconn).[21]
The issue of vertical integration (also known as common ownership) has been the main focus of policy makers because of the possibility of anti-competitive behaviors affiliated with market influence. For example, in United States v. Paramount Pictures, Inc., the Supreme Court ordered the five vertically integrated studios to sell off their theater chains and all trade practices were prohibited (United States v. Paramount Pictures, Inc., 1948).[23] The prevalence of vertical integration wholly predetermined the relationships between both studios and networks[clarification needed] and modified criteria in financing. Networks began arranging content initiated by commonly owned studios and stipulated a portion of the syndication revenues in order for a show to gain a spot on the schedule if it was produced by a studio without common ownership.[24] In response, the studios fundamentally changed the way they made movies and did business. Lacking the financial resources and contract talent they once controlled, the studios now relied on independent producers supplying some portion of the budget in exchange for distribution rights.[25]
Certain media conglomerates may, in a similar manner, own television broadcasters (either over-the-air or on cable), production companies that produce content for their networks, and also own the services that distribute their content to viewers (such as television and internet service providers). AT&T, Bell Canada, Comcast, Sky plc, and Rogers Communications are vertically integrated in such a manner—operating media subsidiaries (such as WarnerMedia, Bell Media, NBCUniversal, and Rogers Media), and provide "triple play" services of television, internet, and phone service in some markets (such as Bell Satellite TV/Bell Internet, Rogers Cable, Xfinity, and Sky's satellite TV and internet services). Additionally, Bell and Rogers own wireless providers, Bell Mobility and Rogers Wireless, while Comcast is partnered with Verizon Wireless for an Xfinity-branded MVNO. Similarly, Sony has media holdings through its Sony Pictures division, including film and television content, as well as television channels, but is also a manufacturer of consumer electronics that can be used to play content from itself and others, including televisions, phones, and PlayStation video game consoles. AT&T is the first ever vertical integration where a mobile phone company and a film studio company are under same umbrella.
Vertical integration through production and marketing contracts have also become the dominant model for livestock production. Currently, 90% of poultry, 69% of hogs, and 29% of cattle are contractually produced through vertical integration.[26] The USDA supports vertical integration because it has increased food productivity. However, "... contractors receive a large share of farm receipts, formerly assumed to go to the operator's family".[27]
Under production contracts, growers raise animals owned by integrators. Farm contracts contain detailed conditions for growers, who are paid based on how efficiently they use feed, provided by the integrator, to raise the animals. The contract dictates how to construct the facilities, how to feed, house, and medicate the animals, and how to handle manure and dispose of carcasses. Generally, the contract also shields the integrator from liability.[26]Jim Hightower, in his book, Eat Your Heart Out,[28] discusses this liability role enacted by large food companies. He finds that in many cases of agricultural vertical integration, the integrator (food company) denies the farmer the right of entrepreneurship. This means that the farmer can only sell under and to the integrator. These restrictions on specified growth, Hightower argues, strips the selling and producing power of the farmer. The producer is ultimately limited by the established standards of the integrator. Yet, at the same time, the integrator still keeps the responsibility connected to the farmer. Hightower sees this as ownership without reliability.[29]
Under marketing contracts, growers agree in advance to sell their animals to integrators under an agreed price system. Generally, these contracts shield the integrator from liability for the grower's actions and the only negotiable item is a price.[26]
Automotive industry
In the United States new automobiles can not be sold at dealerships owned by the same company that produced them but are protected by state franchise laws.[30]
Ford Motor Company vertically integrated due to high demand for their Model T automobile. With the development of Model T, the company required a system in which mass production was most efficient. The model called for the manufacture of additional devices, all of which had carefully-curated designs by Ford engineers. Instead of passing these instructions and duties off to external manufacture firms, vertical integration was exercised within the corporation. This allowed for manageable division of labor, decreased costs in delay and exchange of goods, and organized updates of each firm in the supply chain. Vertical integration enabled Ford Motor Company to be self-regulating and self-sufficient.[31]
Eyewear
EssilorLuxottica, the company that merged with Essilor and Luxottica, occupies up to 30% of the global market share as well as representing billions of pairs of lenses and frames sold annually. Before the merger, Luxottica also owned 80% of the market share of companies that produce corrective and protective eyewear as well as owning many retailers, optical departments at Target and Sears, and key eye insurance groups, such as EyeMed, many of which are already part of the now merged company.[32][33][34][35]
Health care
Within healthcare systems, horizontal integration is generally much more prominent. However, in the United States, major vertical mergers have included CVS Health's purchase of Aetna, and Cigna's purchase of Express Scripts. The integration of CVS Health and Aetna resulted in the combination of one of the nation's largest health insurance companies with a pharmaceutical company seen all across the U.S. The vertical merge allowed CVS-Aetna to regulate more of the healthcare and delivery chain and gave them the ability to provide higher quality care to consumers. One of the most significant advantages to this integration is the reduction in costs for healthcare.[36][citation needed]
Before a wave of deregulation at the end of 20th century, most electric utilities were vertically integrated and provided electric generation, transmission, distribution, and sales. These were not just conglomerates with a common accounting department: there was just one profit center in sales, and costs of transmission and distribution were not separated. Partial deregulation in the US in 1978 (PURPA) forced the utilities to buy electricity outside if the rates were competitive; this gave rise to independent power producers. The other deviation from the vertical integration model were local distribution companies in some towns and regions. In the US 250 vertically integrated companies provided 85% of electrical generation.[37] As of 2022, this "public utility" model was still utilized in some US states, mostly in the Mountain West, Great Plains, and Southeast.[38]
Economic theory
An economic theory is a framework that defines how a particular economic system functions. Economists develop principles in which an economy adheres to, which provides insight onto the relationships between economic events, markets, companies, and the government.[39] In economic theory, vertical integration has been studied in the literature on incomplete contracts that was developed by Oliver Hart and his coauthors.[40][41] Consider a seller of an intermediate product that is used by a buyer to produce a final product. The intermediate product can only be produced with the help of specific physical assets (e.g., machines, buildings). Should the buyer own the assets (vertical integration) or should the seller own the assets (non-integration)? Suppose that today the parties have to make relationship-specific investments. Since today complete contracts cannot be written, the two parties will negotiate tomorrow about how to divide the returns of the investments. Since the owner is in a better bargaining position, he will have stronger incentives to invest. Hence, whether vertical integration is desirable or not depends on whose investments are more important. Hart's theory has been extended by several authors. For instance, DeMeza and Lockwood (1998) have studied different bargaining games,[42] while Schmitz (2006) has introduced asymmetric information into the incomplete contracting setup.[43] In these extended models, vertical integration can sometimes be optimal even if only the seller has to make an investment decision.
Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the economy as a whole, which is studied in macroeconomics.
In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.
Logistics is the part of supply chain management that deals with the efficient forward and reverse flow of goods, services, and related information from the point of origin to the point of consumption according to the needs of customers. Logistics management is a component that holds the supply chain together. The resources managed in logistics may include tangible goods such as materials, equipment, and supplies, as well as food and other consumable items.
A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods in distribution channels within the supply chain in the most efficient manner.
Horizontal integration is the process of a company increasing production of goods or services at the same level of the value chain, in the same industry. A company may do this via internal expansion or through mergers and acquisitions.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.
In microeconomics, diseconomies of scale are the cost disadvantages that economic actors accrue due to an increase in organizational size or in output, resulting in production of goods and services at increased per-unit costs. The concept of diseconomies of scale is the opposite of economies of scale. It occurs when economies of scale become dysfunctional for a firm. In business, diseconomies of scale are the features that lead to an increase in average costs as a business grows beyond a certain size.
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as transaction cost theory, managerial economics and behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.
Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:
Agile manufacturing is an emerging strategic approach that focuses on a few key principles. These include flexibility, rapid response, collaboration and continuous improvement. Agile manufacturing is a term applied to an organization that has created the processes, tools, and training to enable it to respond quickly to customer needs and market changes while still controlling costs and quality. It is mostly related to lean manufacturing.
Reverse logistics encompasses all operations related to the upstream movement of products and materials. It is "the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics." Growing green concerns and advancement of green supply chain management concepts and practices make it all the more relevant. The number of publications on the topic of reverse logistics have increased significantly over the past two decades. The first use of the term "reverse logistics" in a publication was by James R. Stock in a White Paper titled "Reverse Logistics," published by the Council of Logistics Management in 1992. The concept was further refined in subsequent publications by Stock (1998) in another Council of Logistics Management book, titled Development and Implementation of Reverse Logistics Programs, and by Rogers and Tibben-Lembke (1999) in a book published by the Reverse Logistics Association titled Going Backwards: Reverse Logistics Trends and Practices. The reverse logistics process includes the management and the sale of surplus as well as returned equipment and machines from the hardware leasing business. Normally, logistics deal with events that bring the product towards the customer. In the case of reverse logistics, the resource goes at least one step back in the supply chain. For instance, goods move from the customer to the distributor or to the manufacturer.
A contract manufacturer (CM) is a manufacturer that contracts with a firm for components or products. It is a form of outsourcing. A contract manufacturer performing packaging operations is called copacker or a contract packager. Brand name companies focus on product innovation, design and sales, while the manufacturing takes place in independent factories.
Electronics manufacturing services (EMS) is a term used for companies that design, manufacture, test, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs). The concept is also referred to as electronics contract manufacturing (ECM).
Supply-chain sustainability is the management of environmental, social and economic impacts and the encouragement of good governance practices, throughout the lifecycles of goods and services. There is a growing need for integrating sustainable choices into supply-chain management. An increasing concern for sustainability is transforming how companies approach business. Whether motivated by their customers, corporate values or business opportunity, traditional priorities such as quality, efficiency and cost regularly compete for attention with concerns such as working conditions and environmental impact. A sustainable supply chain seizes value chain opportunities and offers significant competitive advantages for early adopters and process innovators.
Market foreclosure or vertical foreclosure, is the production limitation put on a producing organisation if either it is denied access to a supplier, or it is denied access to a downstream buyer. A supplier or intermediary in a supply chain could acquire this form of market power against competitors through means of mergers and acquisitions. This amalgamation of suppliers and customers demonstrates vertical integration along a value chain with various strategic and efficiency benefits including elimination of successive monopoly markups and lowering transaction costs.
Third-party logistics is an organization's long term commitment of outsourcing its distribution services to third-party logistics businesses.
A product defect is any characteristic of a product which hinders its usability for the purpose for which it was designed and manufactured.
Netchain analysis is a theoretical concept integrating supply chain management and network analysis which was introduced by Lazzarini, Chaddad and Cook in 2001. While supply chain analysis focuses on vertical and network analysis on horizontal interdependencies across companies, netchain analysis incorporates both type of interdependencies into one concept. Netchain analysis emphasizes value creation and coordination mechanism sources corresponding to different kind of interdependencies. In practice, netchain analysis is often used in a more general way referring to the perspective that takes into account chain and network characteristics as well. However, it differs in the focus and in the tools used from network science.
Double marginalization is a vertical externality that occurs when two firms with market power, at different vertical levels in the same supply chain, apply a mark-up to their prices. This is caused by the prospect of facing a steep demand curve slope, prompting the firm to mark-up the price beyond its marginal costs. Double marginalization is clearly negative from a welfare point of view, as the double markup induces a deadweight loss, because the retail price is higher than the optimal monopoly price a vertically integrated company would set, leading to underproduction. Thus all social groups are negatively affected because the overall profit for the company is lower, the consumer has to pay more and a smaller amount of units are consumed.
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↑ Chen, Y. (2001). On Vertical Mergers and Their Competitive Effects. The Rand Journal of Economics, 32(4), 667–685, doi:10.2307/2696387
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↑ Folsom, Burton The Myth of the Robber Barons 5th edition. 2007. pg. 65. ISBN978-0963020314. "only we can develop ability and hold it in our service. Every year should be marked by the promotion of one or more of our young men."
↑ Oba, Goro; Chan-Olmstead, Sylvia (2006). "Self-Dealing or Market Transaction?: An Exploratory Study of Vertical Integration in the U.S. Television Syndication Market". Journal of Media Economics. 19 (2): 99–118. doi:10.1207/s15327736me1902_2. S2CID153386365.
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