Ensuring Supply Confidence with Particular Reference to the Backward Integration

“ENSURING SUPPLY CONFIDENCE WITH PARTICULAR REFERENCE TO THE BACKWARD INTEGRATION”

Mr. VikramBalkrishnaGadakh Prof. UpendraSaharkar

Civil Engineering Department P. G. Coordinator, Civil Department

Shatabdi Institute of Engineering and Research, D. Y. Patil Institute of Engineering

Agaskhind, Sinner, Nasik Ambi, Pune

email – email –

Abstract – Raw materials are the factors of production along with labor and capital. Raw materials are important to the production process as sustainable growth in modern business is highly dependent on the efficient use of raw materials (inputs).Backward integration is a type of vertical integration in which consumer of raw material acquires its suppliers or sets up his own facilities for manufacturing to ensure more reliable and cost-effective supply of inputs. The process of backward integration involves integrating the supply chain within the corporate family. Backward integration is a strategic decision.

Keywords – Supply chain, Backward integration, forward integration,

I INTRODUCTION

A supply chain is a network of business entities involved, through upstream and downstream links, in the different processes and activities that produce physical goods or services to customers (or more simply put the Supply Chain is a series of activities that an organization uses to deliver value, either in the form of a product, service, or a combination of both, to its customers).

1.1 Supply Chain Management:

A definition for supply chain management (SCM) can be a network (fig.1) of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products and the distribution of these finished products to customers. In this definition, the emphasis is on transfer of material for processing at several stages and their distribution.

The supply chain encompasses all activities associated with the flow and transformation of goods from raw material stage through the end user, as well as the associated

Figure 1 The Supply Chain Network

information flows. Supply chain management (SCM) is the integration of these activities through improved supply chain relationship to achieve a sustainable competitive advantage.

Supply chain management is a cross-function approach including managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end-consumer. As organizations strive to focus on core competencies and becoming more flexible, they reduce their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and the velocity of inventory movement.

Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes. An example scenario: the purchasing department places orders as requirements become known. The marketing department, responding to customer demand, communicates with several distributors and retailers as it attempts to determine ways to satisfy this demand. Information shared between supply chains partners can only be fully leveraged throughprocess integration.

Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information. Operating an integrated supply chain requires a continuous information flow. However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business

The challenge that exists today is to identify the major changes taking place in Supply Chain Management and address those changes through action agenda items. Such agendas are critical to success as they not only reveal major gaps that require attention, but also assist companies in focusing and directing activities which will close those gaps. The underlying message is that organizations must both perceive and manage their supply chains as a holistic strategic imperative rather than a set of tactical practices.

1.1.1Supply Chain Management Tomorrow:

The future for Supply Chain Management looks very bright. This year, as well as last year, two major trends are benefiting Supply Chain Management operations. These are

• Customer service focus

• Information technology

Successful organizations must be excellent in both of these areas, so the importance of Supply Chain Management and the tools available to do the 1.1.2 The Supply Chain Management Pipeline:

The freight transportation industry has undergone a revolutionary change during the last decade. As deregulation spread to all modes of transport, the number of surviving Companies declined. Carriers unprotected by regulation discovered they could not differentiate themselves from the competition on price alone. Successful transportation companies must provide prompt pickup, excellent customer service, and swift, complete and damage-free delivery. The motor carrier industry forges a critical link in a multimodal Supply Chain

Management system and must compete against time and service to stay in business. Shippers move cargo over whatever mode provides the best service. Less-than-truckload (LTL) motor carriers find their competition particularly stiff. Parcel carriers constantly increase their maximum shipment weight while truck load carriers now accept partial trailer loads as small as 10,000 pounds.

Customers' needs have also changed. The growth of Just-in-Time and Quick Response inventory management and third-party Supply Chain Management requires all participants in the Supply Chain Management chain to consider shorter cycle time a competitive advantage. Manufacturers, distributors, and some carriers effectively use information technology to reduce cycle times and improve the quality of freight handling. Package handlers use the technology to great competitive advantage.

LTL carriers are beginning to adapt their information systems to provide on-line, real-time data on the movement of freight through their systems. To successfully use information technology to speed the movement of freight, these carriers must have low cost methods to accurately gather and disseminate data. Bar code and radio frequency technologies provide the tools for LTL carriers to survive and thrive.

Traditional bar codes uniquely identify every package in the pipeline. Scanning the packages positively confirms custody transfer from shipper to carrier to consignee. Two dimensional bar codes on shipping documents record the entire bill of lading (BOL). Scanners in drivers' hands provide error-free entry of the BOL in less than a second. Radio communication from the truck cab to central operations immediately informs dispatchers of incoming freight. Similar scanning during delivery shortens the billing cycle and provides positive confirmation of delivery. Dock management systems speed cross docking operations. A combination of radio Communication and bar code scanning immediately delivers control information to people who need it. From dispatchers to fork operators, every member of the dock team receives immediate information where they work. The system efficiently tracks all packages from inbound docks through staging to outbound docks. No package waits for information. Yard management systems ensure the delivery of the right equipment to the right location at the right time. Radio communication to yard tractors keeps shuttle drivers working on the highest priority tasks. Real-time communication between yard drivers, hub managers, and information support systems provides positive control of all moving stock. Optimizing personnel and rolling stock results in shortened stripping and loading time at the doors. Consistent application of appropriate information technology throughout the Supply Chain Management pipeline results in shortened cycle times and lowered effort. Immediate, reliable information allows managers to optimize their physical and human resources. While maximum benefit comes to those carriers who implement a consistent information strategy throughout their operations, segmentation of the problem allows carriers to phase in their transformation. Each phase provides immediate economic benefits, while improving the strategic position of the carrier.

1.1.2Co-coordinating Multiple Initiatives Through IT:

The Supply Chain Management model of LTL carriers offers the greatest advantage and the fundamental vulnerability of the mode. City terminals break bulk consolidation, and other cargo transfer techniques allow LTL carriers to sell economies of scale to shippers with small cargo consignments. However, the same process requires multiple handling and offers frequent opportunities for delays, mis-shipments, and cargo damage. Effective use of information technology maximizes the advantages and minimizes the risks inherent in LTL transportation. Each package must be positively identified every time it is handled. Information about every destination must be checked and double checked to maximize cargo speed while minimizing empty trailer miles.

Implementation of competitive information technologies begins wherever carriers feel they need the most assistance. For many, dock management represents a logical starting point. Positive tracking of every package in and out of every hub drastically reduces the possibility of cargo delays and damage. Automatic optimization techniques simultaneously reduce handling expenses and allow some trailers to bypass consolidation hubs entirely. When carriers augment a dock management system with yard management support, the two projects amplify each other's advantages. Yard management initiatives closely control the movement of trailers and drivers based on information provided by the dock management system. The dock management system, in turn, profits from data provided by pickup and delivery automation. When shipment information from city drivers immediately flows to the hubs, support systems and supervisors can anticipate requirements. Incoming cargo stays in motion because dock managers already know what is on each inbound truck. If pickup and delivery systems are not immediately automated, carriers can implement intermediate systems to efficiently feed information to hub management support projects.

Dockside data collection allows operators to enter all data about an inbound truck's cargo at the dock even as operators strip the cargo for consolidation. Dockside data collection becomes more efficient when carriers encourage their shippers to produce scan able bills of lading. These documents can be produced on existing printers with specialized software. A two-dimensional bar code encodes all necessary shipment information. In less than one second, a dockside scanner captures an entire bill of lading. The same scan able documents can be used when the carrier later implements a pickup and delivery management system. Effective supply-chain management may be the best way to achieve reduced order-to delivery cycle time. Instead of treating each function as consisting of discrete activities,

Supply-chain management considers all functions to be linked and interdependent. As a result, supply-chain management can reveal the cumulative effect of problems anywhere in the chain, not just within Supply Chain Management' areas of responsibility.

2. VERTICALINTEGRATION

Vertical integration refers to an expansion of a business by an organization on the same production path. For example whena manufacturer owns its supplier and/or distributor.Vertical integration can help companies reduce costs and improve efficiency by decreasing transportation expenses and reducing turnaround time. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated. The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to asvertical integration expansion. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. For example, a solar power company that produces photovoltaic products and also manufacturers the cells, wafers and modules to create those products would be considered vertically integrated. The causes of vertical integration and its consequences on market outcomes and consumer welfare have been extensively researched and discussed by academic and industry scholars.

According to these theories, vertical integration can on the one hand promote efficiency by eliminating successive monopoly mark-ups, internalizing service, and mitigating contractual problems between firms. On the other hand, it can facilitate the strategic practice of market foreclosure, whereby an integrated firm denies rivals access to markets in order to gain greater market power. The first effect results in lower prices, higher sales, and greater consumer welfare, while the second raises the prices of final goods, thereby harming consumers.

There are three broad determinants of vertical integration:

(A) Technological economies,

(B) Transactional economies, and

(C) Market imperfections.

2.1 Technological Economies:

Vertical integration may arise from technological economies of integration. In particular, less of the other intermediate inputs may be required in order to Obtain the same output in the downstream process when the firm has integrated One of the upstream processes. A typical example is the energy savings from not having to reheat steel in the production of steel sheet. Even though the down- stream production process has a well-defined production frontier given a set of intermediate inputs purchased through contracts or markets, a more efficient frontier exists when the set of inputs is broadened to include primary inputs. Vertical integration not only replaces some intermediate inputs with primary inputs, but it also reduces the requirements of other intermediate inputs. This is the sense in which technological economies of integration give rise to vertical integration. Technological economies may be an important determinant of vertical integration in some industries.

In the theoretical discussions, we will generally presume that firms have integrated so as to internalize technological economies. This allows us to focus upon the more interesting economic reasons for vertical integration. Vertical integration may also arise from transactional economies. Transaction costs are different from production costs in that they are associated with the Process of exchange itself. However, there is a conceptual analogy to technology economies. Intermediate “technological inputs” as intermediate "exchange inputs" of the downstream production process. Transactional economies could then be defined in exactly the same fashion as technological economies. In particular, vertical integration into the production of intermediate technological inputs would reduce the requirements of intermediate exchange inputs.

2.2 Transactional Economies:

Transactional economies are an important determinant of vertical integration. Vertical integration can arise from imperfections in markets. Imperfect competition is the most notable example, but other market imperfections also give rise to vertical integration. For example, we will discuss imperfections caused by externalities and imperfect or asymmetric information. How is this distinguished from transaction cost economics? In transaction cost economics, the primary determinant of vertical integration is "asset specificity" in one or both of the production processes. Asset specificity means that an upstream or downstream firm has made investments such that the value of an exchange is greatest when it occurs between these two firms rather than with other firms. Thus, transaction-specific assets create bilateral monopoly.

One cannot then talk about a market for the intermediate input existing between the two firms. Neither firm would necessarily have the ability to set the price or choose the quantity unilaterally. Price, quantity, and any other important dimension of the good (such as quality and delivery) would be determined by negotiation and embodied in a contract. Thus, in transaction cost economics "contractual" exchanges are the relevant alternative to "internal" exchanges. The choice between the two depends upon differences in the cost of "governing" the contractual relationship.

2.3What then is Meant by a “Market” Exchange?

These are exchanges which require no negotiations or governance of a continuing relationship. Rather, they are take-it-or-leave-it exchanges in which the price, quantity, and other dimensions of the good are each set by one firm or the other. For example, an upstream manufacturer may set the price and quality, while the downstream Intermediate exchange inputs could also be integrated, for example by hiring the lawyers necessary for making contracts. However, the economies from such probably arise from the reduced requirement of other exchange inputs, such as expenses for outside legal counsel, rather than technological inputs

3. VERTICAL INTEGRATION TYPES

• Backward Integration:A company exhibitsbackwardvertical integrationwhen 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 a consistent quality in their final product. It was the main business approach ofFordand other car companies in the 1920s, who sought to minimize costs by integrating the production of cars and car parts as exemplified in theFord River Rouge Complex.
• Forward integration:A company tends towardforward vertical integrationwhen it controls distribution centers and retailers where its products are sold.

3.1 The Concept of Vertical Integration:

No Integration
Raw Materials

Intermediate
Manufacturing

Assembly

Distribution

End Customer
/ Backward Integration
Raw Materials

Intermediate
Manufacturing

Assembly

Distribution

End Customer
/ Forward Integration
Raw Materials

Intermediate
Manufacturing

Assembly

Distribution

End Customer

Figure 2: Vertical Integration