1. Supply Chain Management: Strategic Issues
Vertical and horizontal cooperation in a
Supply Chain
November, 9th 2011
Supply Chain Management // Prof. Dr. Wollny

2. Agenda
1. Introduction
2. Vertical Cooperation
3. Horizontal Cooperation
4. Conclusion
2

3. 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)
3

4. 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
4

5. 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
5

6. 1. Introduction: Forms and fields of cooperation
Attributes Characteristics
Direction horizontal vertical diagonal
Expansion local regional national global
Duration temporary unlimited
Fields of R&D distribution purchasing marketing production
cooperation
Forms of cooperation:
• Service Agreements • Cooperatives • Cooperative Agreements
• Joint Ventures • Consortia • Licensing
6

7. 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
7

8. 2. Vertical Cooperation
Buyers
Stores
Vertical Importers Forward
Manufacturers
Backward
Suppliers
Commodity
producers
8

9. 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
9

10. 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 Differences Cooperation
• Reduce transportation costs • The company remains independent and
• Participate upstream or downstream therefore flexible
profit margins • Easy exit of cooperation
• Lead to expansion of core competencies • No high capital investments required
• Decreased flexibility • Risk of Know-How outflow
• High dependency on strong partners
Common Disadvantages
• Higher coordination costs
• Lack of supplier competition  higher costs, less efficient
10

11. 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
11

12. 2.3 Vertical Cooperation: Example
Advantages for Toyota Advantages for Suppliers
• Integrated system (JiT) • Economies of scale
• High quality • Constant orders
• Shared development costs • Know-How transfer
• Cost reduction • Shared development costs
• Secured supply • Shared financing
• High influence on suppliers • Not easily replaceable
12

13. 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
13

14. 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)
14

15. 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
15

16. 3. Horizontal Cooperation
Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity
producers
Horizontal
16

17. 3.1 Horizontal Cooperation: SWOT Analysis
Strengths Weaknesses
• Cost sharing • Costs of coordination
• Efficient allocation of • Capital investments may be
production necessary
• Production flexibility • Lack of control
Opportunities Threats
• Using of partners‘ Know How • Transition of bad image
• Access to new markets • Choosing of „wrong“ partner
• Customer acquisition for long-term cooperation
• EU competition rules
17

18. 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
18

19. 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
19

20. 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
20

21. Thank you for your attention
21

22. Bibliography
Beckmann, H. (2004). Supply Chain Management: Strategien und Entwicklungstendenzen in Spitzenunternehmen. Berlin: Springer Verlag.
Becker et al. (2011). Netzwerkmanagement: Mit Kooperation zum Unternehmenserfolg. Berlin: Springer Verlag.
George Von Krogh,Johan Roos (2000). Managing knowledge: perspectives on cooperation and competition
Hertel et al. (2011). Supply-Chain-Management und Warenwirtschaftssysteme im Handel. Berlin: Springer Verlag.
Röderstein R. (2009). Erfolgsfaktoren im Supply Chain Management der DIY-Branche. Wiesbaden: Gabler Verlag
Seuring S. & Goldbach M. (2002). Cost Management in Supply Chains. Heidelberg: Physica-Verlag
Sunil Chopra, S./ Meindl, P (2007): Supply Chain Management. Strategy, Planning, and Operation, Third Edition.
Wannenwetsch, H. (2005). Vernetztes Supply Chain Management: SCM-Integration über die gesamte Wertschöpfungskette. Berlin: Springer
Verlag.
http://www.investopedia.com/terms/v/verticalintegration.asp#axzz1cHvyisYa
http://www.economist.com/node/13396061
http://www.12manage.com/methods_vertical_integration_de.html
http://ig.cs.tu-berlin.de/lehre/w2005/ir1/uebref/NaQuRo-VertikaleIntegrationUndWettbewerb-2005-12-15.pdf
http://www.quickmba.com/strategy/vertical-integration/
http://www.strategy-train.eu/index.php?id=138&L=1
EU Guidelines on horizontal cooperation agreements
http://blogs.hbr.org/hbr/mcgrath/2009/12/vertical-integration-can-work.html
http://www.techiteasy.org/2007/07/28/starbucks-an-example-of-vertical-integration/
http://online.wsj.com/article/SB10001424052748704462704575609733431622088.html
http://www.independent.co.uk/news/business/news/starbucks-to-more-than-double-store-opening-rate-2132888.html
http://www.economics.phil.uni-erlangen.de/bwl/exist_gr/koop.pdf
http://www.wirtschaftslexikon24.net/d/kooperation/kooperation.htm
22