The benefits of vertical integration in the retail supply chain

This year, I was invited to attend SCOPE East, an event hosted by industry experts and dedicated to strategic, tactical and operational supply chain issues. Among the many educational workshops I attended (topics ranged from sales to consumer goods), one that caught my attention waswas presented by luxury goods retailer and manufacturer Tiffany & Co, and dealt with vertical integration in the retail supply chain.
Companies deploying this type of strategy control both the upstream and downstream parts of the supply chain: they own the supply of raw materials, and control the distribution of finished products. This gives them complete visibility at every level, from cultivation and sourcing of raw materials, to manufacturing, transport, marketing and retailing.
In a vertical strategy, each of these processes is managed by the company. It is essential for a retail business to have a vertically integrated strategy with competitive pricing.

Vertical integration is neither a new concept nor a new strategy

Vertical integration is neither a new concept nor a new strategy. In fact, many companies are already thinking about it from a strictly competitive and financial point of view. That said, during the presentation I was able to note a few key benefits, examined in terms of costs and customer service, by Joe Shearn, Vice President of Distribution at Tiffany & Co.

1. Cost benefits for Tiffany & Co:

• control over a selection of mined diamonds,
• direct sourcing of rough diamonds at source (no middleman),
• be able to match information on demand with the means available to meet it (manufacturing and distribution),
• be able to sell surplus stones that do not meet Tiffany & Co. quality criteria to other players in the luxury goods industry.

2. The advantages in terms of customer service enjoyed by Tiffany & Co. thanks to vertical integration:

• to offer a quality product at a competitive price with narrow margins, without compromising product or service quality,
• to know the product from origin to destination. In this way, the customer can obtain the diamond's history and envisage its durability (e.g.: where it came from, where it was manufactured, its journey to the final stage, and by which distribution company it was delivered),
• offer customers a wide range of diamonds, thanks to the selection of raw materials directly at source,
• be more responsive to any surge in demand, and have visibility over the pipeline and what is being mined.

Is vertical integration always a good choice?

While these are good reasons in terms of costs and customer service, does it make sense for this company to move away from its original business of designing and manufacturing luxury goods?

From my point of view, nothing beats a fully vertically integrated company. The question is not whether to be vertically or horizontally integrated, but rather to identify the optimal degree of vertical integration. In addition, companies need to be cautious about balancing workloads and capabilities, as having everything under the control of a single entity will not eliminate all difficulties and costs.This is because having everything under the control of a single entity will not eliminate all the difficulties and headaches caused by the vagaries of demand, regulation and unforeseen events (war, mine explosion, etc.).).

When a company is considering vertical integration, and wondering to what extent it should be adopted, it needs to ask itself the following questions:

• Will we reduce our costs in the long term by controlling upstream and downstream operations?
• Will we be more operationally efficient by controlling both upstream and downstream?
• Does being vertically integrated make a company more competitive with its competitors?

What integration strategy has your company chosen? Vertical, horizontal or perhaps a hybrid strategy? Let me know by leaving a comment!