This document discusses strategic issues in supply chain management, focusing on vertical and horizontal cooperation. It defines cooperation as collaboration between independent companies to increase competitiveness. Vertical cooperation involves different stages of the value chain working together, while horizontal cooperation is between companies in the same industry and stage. Examples discussed include Toyota's supplier relationships and Starbucks' backward integration into coffee farming. Both cooperation and integration are presented as strategic approaches for companies to meet challenges of globalization.

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
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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)
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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
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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
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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
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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
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8. 2. Vertical Cooperation
Buyers
Stores
Vertical Importers Forward
Manufacturers
Backward
Suppliers
Commodity
producers
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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
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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
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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
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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
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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
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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)
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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
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16. 3. Horizontal Cooperation
Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity
producers
Horizontal
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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
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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
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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
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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
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21. Thank you for your attention
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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.
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http://www.economist.com/node/13396061
http://www.12manage.com/methods_vertical_integration_de.html
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http://www.quickmba.com/strategy/vertical-integration/
http://www.strategy-train.eu/index.php?id=138&L=1
EU Guidelines on horizontal cooperation agreements
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http://www.independent.co.uk/news/business/news/starbucks-to-more-than-double-store-opening-rate-2132888.html
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http://www.wirtschaftslexikon24.net/d/kooperation/kooperation.htm
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