Growing mid-sized businesses will eventually reach a fork in the road where they have to decide whether to integrate or continue outsourcing.
The decision can be difficult. Vertical integration — when a company takes ownership of its supply chain — can give businesses greater control over costs, efficiency and product quality. But continuing to outsource portions of your supply chain allows you to focus on your core business while still relying on trusted business partners.
Here are four things to consider when deciding whether to vertically integrate your company or continue to grow your core business.
- Outsource what you are not good at
Vertical integration can increase efficiency and quality, and help you synchronize supply and demand. If you feel you can optimize your supply chain better than your suppliers, vertical integration should be carefully considered. But vertical integration feels like venturing into unfamiliar territory where you lack expertise and skill, consider continuing to outsource your supply chain to the experts. Vertical integration is a tall task, and taking it on is a commitment comparable to starting a new business from the ground up.
- Build strong relationships with good suppliers
You do not always have to vertically integrate your business to increase control of your supply chain. If you work with trusted suppliers, building long-term contracts or stronger relationships can help you lock in long-term supply or increase your say in product quality. If you want the control of vertical integration, but don’t want to tackle the task of building a fully integrated company, consider a compromise where you strengthen your relationships with suppliers to increase your efficiency, cost control and quality.
- Integrate for scale or scarcity
Vertical integration often requires scale and pays off when there is scarcity in your supply chain. If you are a fast-growing business that is scaling rapidly and your supply chain utilizes scarce resources, vertical integration might give you the control over your supply chain that you need.
Controlling a limited supply chain can differentiate you from your competitors. Battery makers that require rare metals, specialty builders than require high-quality wood or steel, high-end consumer packaged goods that require specialty grains or ingredients all should consider vertically integrating.
- Be tax smart and use good business strategies
Vertical integration is a big business decision, and comes with significant tax consequences. Make sure you calculate all the impacts of vertical integration before launching into the effort. Research and development tax credits, domestic production deductions and other incentives and tax credits should be fully explored by a business.
Approach vertical integration like opening a new business. Complete a tax analysis, audit the competitive landscape, and carefully consider the structure of the new business entity.