Posts Tagged ‘vertical integration’

Vertical Integration is Back in Style

August 8th, 2010 Comments off

Courtesy of Scott Ingram Photography on Flickr

I’ve written before about companies like Boeing and Pepsi that have sought more control over their products with the result being that they have purchased other value chain members.  Credit goes to a current (for another week) student, Kevin Hoese, for pointing out an article in today’s Star Tribune that focuses make vs. buy and vertical integration opportunities at Minnesota companies like Arctic Cat, 3M, and Toro.

Arctic has manufactured ATVs since 1995, but has been making the engines in Minnesota for only about four years and at the St. Cloud plant since 2007. The previous supplier, Suzuki Motor Corp., still makes Arctic’s snowmobile engines, but that too is about to change. Arctic has plans to move production of those engines, now built in Japan, to St. Cloud as well — a move that will add a still undisclosed number of jobs to the plant’s roster of 35 workers.

That control is even more difficult when plants are in far-flung corners of the world. “In a volatile economy like this one it is hard to be flexible when you’re sourcing things from half a world away,” Zimmerman said.

That was the case for Bloomington-based Toro Co., which used to buy wheels and tires for its snow throwers and mowers from a Chinese supplier but now produces them at a Toro facility in El Paso, Texas. “Over the past two years, with demand fluctuating down and then up, we need suppliers that are flexible and responsive in shorter windows,” said Judy Altmaier, vice president of operations. “Some of our off-shore suppliers are capable of supplying us with quality products at a competitive price, and are flexible in meeting our changing schedules. Others are not,”

Factors range from quality concerns to flexibility issues to rising costs of transportation, but whatever the reason, it seems that too many companies overestimated the ease with which they could outsource work to the other side of the globe.  Chances are that they overestimated the cost savings as well.  It will be interesting to watch the economy to see how much of this continues to happen in the next few years.  There certainly are skilled laborers in the United States that are looking for work and perhaps “onshoring” will be part of the answer to the high unemployment figures we see right now.

Of course there are some local companies that are hurt when their customers move some work in-house.  So the fact that more companies are doing work themselves isn’t the cure-all for everyone:

The move by manufacturers to do more work in-house has hurt some businesses that have been suppliers. Permac Industries, a Burnsville-based company that makes precision-machined parts for a variety of industries, saw its sales fall about 40 percent in 2009 partly because customers were doing more of that work themselves, said CEO Darlene Miller. She said she knows of other precision parts makers that experienced the same drop-off in business.

Still, for all the reasons we talk about when we discuss make or buy decisions it is important to weigh all of the factors before making business decisions about where to locate work.  For each company that has outsourced only to find that it isn’t working I suspect that there is a company doing something in-house that they really aren’t doing that well.  Sometimes it is better to focus on core competencies and let others do whatever falls outside that boundary.

Read more at:

In a shift, more companies deciding to make, not buy: Many manufacturers are reversing the decades-old outsourcing trend, preferring to build more parts in-house. Susan Feyder. McClatchy – Tribune Business News. Washington: Aug 8, 2010.

Boeing Takes Control of Dreamliner Plant –

December 25th, 2009 Comments off

boeing_logoI wrote about Boeing before with respect to the increased control they were seeking (and efforts they were making to acquire it) when it comes to their suppliers.  The Wall Street Journal once again had a piece the other day about another supplier that Boeing was buying.

Corporate News: Boeing Takes Control of Plant. Peter Sanders. Wall Street Journal. (Eastern edition). New York, N.Y.: Dec 23, 2009. pg. B.2

Companies More Prone to Go ‘Vertical’ –

December 8th, 2009 Comments off

296px-Sun_Microsystems_logo.svgInterestingly, today’s Wall Street Journal contained a trio of articles that all relate to how companies are handling their value chain partners and positioning themselves for the future.  I’m going to make a post for each article because it will make it easier for me to tag/categorize but I think reading all three and understanding how these moves relate to each other is quite interesting.

The first article from page A1 is about how companies are embracing vertical integration — a practice that fell out of favor in recent years.  Specifically mentioned are Oracle’s purchase of Sun Microsystems and Pepsi buying back some bottlers it had spun off a decade ago.

Mr. Ellison is among the executives reviving “vertical integration,” a 100-year-old strategy in which a company controls materials, manufacturing and distribution. Others moving recently in this direction include ArcelorMittal, PepsiCo Inc., General Motors Co. and Boeing Co.

The reasons vary. Arcelor, the world’s largest steelmaker, wants more control over its raw materials. Pepsi wants more authority over distribution. GM and Boeing are moving by necessity, to assure quantity and quality of vital parts from troubled suppliers. Some are repurchasing businesses they only recently shed.

Companies More Prone to Go ‘Vertical.’ Ben Worthen, Cari Tuna, Justin Scheck. Wall Street Journal (Eastern edition). New York, N.Y.: Nov 30, 2009. p. A.1

Boeing Buys Main Supplier

July 12th, 2009 Comments off

Fitting in with the Value Chain material is an article published last week in The Wall Street Journal about Boeing buying one of their main suppliers for the new Dreamliner plane.  I receive a weekly email with WSJ articles that relate to accounting along with some discussion questions and this article was included in the latest email.  Rather than rehash what is said here, I’ll include the email in its entirety including some provided discussion questions that are good things to think about.

Boeing Sets Deal to Buy a Dreamliner Plant
by Peter Sanders
Jul 02, 2009
Click here to view the full article on

TOPICS: Accounting Information Systems, Managerial Accounting, Supply Chains

SUMMARY: “Boeing Co. is in negotiations to purchase operations from one of its main suppliers as part of an effort to gain more control over the supply chain of its troubled 787 Dreamliner program….It will buy a facility from Vought Aircraft Industries that makes sections of the 787 fuselage….” Boeing had planned to have components of the Dreamliner manufactured by suppliers all over the world, but the company “…quickly discovered that keeping track of the different suppliers…was more difficult than it had anticipated….The plane is now two years behind schedule.”

CLASSROOM APPLICATION: The article is good for introducing the concept of a supply chain and supply chain management.

1. (Introductory) Define the terms supply chain, supply chain management system, and value chain.

2. (Introductory) How did the Boeing Corporation initially plan to rely on its supply chain when initiating production of the 787 Dreamliner?

3. (Advanced) What specific supply chain issues did Boeing face with this production plan? How is a supply chain management system supposed to avoid these problems? Of the problems initially listed, which are unlikely to be avoided because of a good supply chain management system?

4. (Advanced) Do you think that Boeing’s acquisition of Vought Aircraft Industries converts the fuselage manufacturing activities from a supply chain to a value chain activity? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

Pepsi Seeks to Buy Bottlers to Eliminate Costs

May 21st, 2009 Comments off

Companies usually try to portray mergers as an opportunity to “trim the fat” or to create more more revenue than the individual companies can do independently.  If these were not the goals, mergers would never take place, right?

The Wall Street Journal today looks at the attempted acquisition by PepsiCo of two large bottling companies (one of which, PepsiAmericas, is based in Minneapolis, by the way).  Interestingly enough, in this situation the two bottlers have themselves looked at merging in the past but the idea was dismissed because estimates of cost savings were “deemed too modest to justify a deal.”

Synergy, like beauty, rests in the eye of the beholder. Just ask PepsiCo.

The soft drink giant is seeking to acquire its two main bottlers–Pepsi Bottling Group and Pepsi Americas–for about $6 billion. Both have rejected Pepsi’s offer. The main issue: synergy, or just how much money can be saved by combining the three companies into one?

Deal Journal / Breaking Insight from Matthew Karnitschnig. Wall Street Journal. (Eastern edition). New York, N.Y.: May 21, 2009. pg. C.3

In time we may know (assuming that one or both of these combinations takes place) if the companies are worth more together than apart, but that is unlikely.  Once the books and the operations are combined the ability to know what “would have happened” had a combination not occurred becomes difficult at best.  There have been some spectacular merger failures in the past few years but several that have gone off without a hitch as well (the failures tend to be more widely covered than the successes).  Who knows what the case will be in this situation.