Advantages and Disadvantages of Vertical IntegrationEssay Preview: Advantages and Disadvantages of Vertical IntegrationReport this essayADVANTAGES OF VERTICAL INTEGRATIONIt leads to reduction of transportation costs as the common ownership results in closer geographic proximity. The transaction costs can be controlled if a firm acquires the other firms in the vertical chain, then one division of the same company will transfer goods to other divisions. So, transaction costs in form of transport, cost of negotiation, cost of control etc. will be eliminated. The overall average cost of the firm will decrease because if the divisions are under same management control then there will be in house supply and departmental heads will determine the transfer price. An example could be pokarna granites limited. The company was established in 1991 as a partnership firm quarrying black galaxy granite in India. Transportation of granite to factories where they can be cut and polished is quite difficult. Since that time, the company has grown to a major quarrier and fabricator of stones from India and around the world. From the very beginning, the company has believed in vertical integration. They begin with the finest raw materials, invariably from their very own quarries, assuring consistent, high quality suppliers.
Uniform governance; If a firm purchases semi finished goods from an outside source then the work culture will be different and there are chances of dispute regarding terms and conditions of supply or if the outside supplier makes breach of contract and does not supply the goods on time then the firm can not fulfil its commitment to the third party and the goodwill of a firm will come to an end. Organizational inferences; If the supplier supplying the raw materials to a firm is big, in terms of size and structure, then it will dictate the terms and conditions. On the other hand if an in-house source is used then there will be no market variation and the supplier can not impose any unfavourable conditions. Due to this reason in November 1999, Exxon Corporation and Mobil Corporation, two of the largest petroleum and petrochemical companies merged to form the Exxon Mobil Corporation. Today Exxon Mobil explores for and produces oil, natural gas and coal in 49 countries around the globe. It sells fuels in over forty thousand service stations in one hundred and eighteen countries.
For firms who are purchasing semi finished goods from outside supplier will make a contract for a long period and due to repeated relationship the firm will be dependent on the outside supplier. In the case of termination of contract, the firm can not make regular supply of goods and services to its customers. There is also a problem of leak of information, information regarding quality and quantity of inputs. For say, grasim is Indias pioneer in viscose staple fibre, manmade, biodegradable fibre with characteristics akin to cotton. Grasim is a part of aditya birla group and it is worlds largest producer of viscose staple fibre. They have three plants along with research institutes. They are also into production of various principal raw materials required for viscose staple fibre production. Made from wood pulp through an eco friendly, non polluting process developed and patented by the aditya birla group. It is the worlds only heavy metal free viscose fibre. Grasim has earned prestigious awards for its technology and its innovative range of fibres therefore they make sure that there is no leak of information by controlling all the aspects of producing the product.
After vertical integration a firm will purchase the goods from dimension of some group so it can maintain the balance between the demand and supply of goods. If demand and final goods increases than the supply of all dimensions can be erased and demand of suppliers can be met, if the firm is dependent on outside source then production will be delayed and there will be problem with coordination of production flows. Indal is a member of the aditya birla group and is a part of Indias aluminium industry for over six decade. It has a nationwide spread of plants and aluminium value chain from bauxite mining, alumina refining, aluminium smelting with captive power to downstream sheet and foil
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In a system of high cost production, it is good policy to increase total investment expenditure in the supply chain of aluminium. Therefore, a firm can increase the aggregate investment of both sides of the industrial supply chain or at least to a minimum, this is one way of making decisions on industrial supply chain development. If an industrial supply chain project cannot be financed for long periods, production may be slow with no alternative but to pay for it. In the case of aluminium supply chain, the supply chain is linked to different countries and can only be adjusted if there is a lack of supply. In this way, it is best to use the same process as in the previous example, or if there is no available cash for the company to pay for production. This can be achieved by the firm using a local supply chain of suppliers or the international supply chain of suppliers.
In such a case, after a short period of time, the firm can change its main account structure and make more use of the capital and the equipment that is available. If this is achieved very much at a reasonable price, it will provide significant output of the products of the supplier. If it is a small firm, if its primary use is to produce aluminium aluminium, the need for production goes beyond the potential supply of product to its customers.
In general, the firm can raise the purchasing power of its suppliers. It could raise the capital expenditure in capital expenditure for those suppliers, although in this instance, that might be good because supply is increased to its customers and could prevent problems if supplier issues a demand demand in excess of the minimum allowed.
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In the current global markets, there is good reason for a firm to put in long term commitments to buy or sell large quantities of low cost and high quality products of aluminium in order to grow a company globally. Such a firm can be made to pay for the production costs the firms use. This will allow them to make better use of the existing inventory of those products.
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In this way, it can be possible to reduce long and short-term cost of sourcing from the global aluminium market. A firm can reduce its initial costs by lowering the price of those aluminium products with the low cost of supplying them through direct service. It can save money by buying off suppliers who will not use high quality products. This way the firm can increase revenue from the supply chain.
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In this way, the demand for the aluminium products of the company is expected to gradually increase by a factor of 3 by the end of the year