Vertical & Horizontal Supply Chains
This article is inspired by the first chapter of the first module of Supply Chain I studied looking at two key types of Supply Chain structure in use. I love this topic as much for how accessible it is to those outside of Supply Chain as I do for how it can illustrate that most human of experiences: the grass isn’t always greener!
Vertical Supply Chain
A vertical supply chain refers to one that is controlled by a single company or a group of companies within the same industry, where they own or directly control multiple stages of the production and distribution process. The classic example would be Ford Motors back in the day: the organization manufactured all of the components, assembled the vehicles and distributed/sold them. Even down to raw materials - Henry Ford purchased rubber plantations to ensure a steady supply of material for tires - there is control and ownership throughout.
Key Characteristics of Vertical Supply Chains:
Ownership and Control: Companies own or control multiple stages of the production and distribution process (e.g., from raw material sourcing to manufacturing, and even retail).
Efficiency & Cost Control: By controlling multiple stages, a company can reduce costs, improve efficiency, and have better control over quality, production times, and inventory management. That being said Vertical Supply Chains can also lead to massive inefficiency with the lack of external competition driving market-rate cost-down and quality.
Greater Coordination: Vertical integration allows for more seamless coordination between different parts of the supply chain, reducing the need for intermediaries. Again, while this can be true, it is only as strong the organization, its culture and alignment to clear business strategy - it those are strengths and clearly defined then a vertical supply chain can provide enormous opportunity.
Risk of Over-Extension: It can also limit agility because a company may become too reliant on its own processes and operations, making it harder to adapt to changes in the market.
As someone who has worked only in horizontal supply chains it is easy to see how attractive a vertical supply chain can look! I look back to working in manufacturing imagining having raw materials directly and not being dependent on a plethora of suppliers, their lead times and inefficiencies! Even something as simple as having one’s own logistics assets and not being dependent upon carriers and capacity however, that grass may look greener but with vertical supply chains there are also numerous risks and challenges.
Horizontal Supply Chain
A horizontal supply chain, involves a company collaborating with a wide variety of suppliers and partners, typically operating at the same level of the supply chain. Instead of controlling multiple stages of production, companies focus on specific segments of the supply chain, working with other businesses that manage different parts of the process. A great example of working within a horizontal supply chain would be in my previous role working for a company that manufactured vinyl windows: we sourced raw materials such as glass sheets, vinyl extrusions, paints, and fixtures from suppliers outside of our group. We distributed through 3PL’s, we sold to consumers through a network of independent dealers.
Key Characteristics of Horizontal Supply Chains:
Outsourcing: Companies in a horizontal supply chain often outsource production and distribution functions to other specialized firms, allowing for more flexibility and focus on core competencies.
Diversification & Specialization: Each company focuses on one part of the process (e.g., one might focus on raw materials, another on assembly, and another on distribution).
Market Flexibility: Since companies are not as vertically integrated, they can more easily adapt to market changes or shift their focus to new suppliers or distribution channels.
Dependence on Partners: A horizontal supply chain relies on strong relationships and coordination with other companies, making it vulnerable to disruptions or inefficiencies in the supply chain.
For those in a vertical supply chain, the grass is greener in the horizontal world due to the agility that can arise from a diversity of supply and competition. An example would be during the constraints through Covid - in a vertical supply chain if the internal supplier could not fulfill then there weren’t other options while horizontally there is the possibility to source from a variety of channels. (Maybe not the best example, some companies are still recovering from a chip shortage!)
The choice between a vertical or horizontal supply chain depends on a company's strategy, resources, and industry. Companies seeking greater control and integration might opt for a vertical supply chain, while those looking for flexibility, specialization, and reduced capital investment might favor a horizontal supply chain. Many modern companies, particularly large ones, often use a combination of both, depending on their product lines and business models - however it’s always worth remembering the grass isn’t always greener on the other side!