Vertical and horizontal cooperation in a Supply Chain

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  • 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. Conclusion2
  • 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 companies4
  • 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 chains5
  • 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 • Licensing6
  • 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 procurement7
  • 8. 2. Vertical Cooperation Buyers Stores Vertical Importers Forward Manufacturers Backward Suppliers Commodity producers8
  • 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 integration9
  • 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 efficient10
  • 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 – JiT11
  • 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 replaceable12
  • 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-How13
  • 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 coordination15
  • 16. 3. Horizontal Cooperation Buyers Stores Importers Manufacturers Suppliers Commodity producers Horizontal16
  • 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 rules17
  • 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 costs18
  • 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 flights19
  • 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 company20
  • 21. Thank you for your attention21
  • 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. EU Guidelines on horizontal cooperation agreements