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The benefits and risks of vertical integration

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When it comes to running a business, complete control is a great thing to have. The less your processes are subject to the fickle whims of the rest of the world, the better.

This is why the idea of vertical integration is so attractive. If you can have more control over the various factors affecting your business, or be responsible for more steps in a production process, you should be able to enjoy more stability. It's important to realise, though, that expanding the breadth of operations of your business comes with both significant benefits and potential risks.

We’re going to look at some of the advantages that vertical integration offers for cutting tool manufacture and some of the pitfalls that need to be considered before making the plunge.
The advantages:

Quality control and consistency

The more elements of cutting tool manufacturing that can be housed “under one roof”, the more control you have over them. No longer are you subject to disruptions caused by other companies in your supply chain. You’ll avoid the frustrating issue of a customer being unhappy with your work or missing a deadline, even though your supplier was responsible for the problem.

Streamlined logistics

The more external steps in the process of manufacturing, the longer everything is going to take. The additional complexity and time required transporting products to and from external suppliers is eliminated by controlling more processes yourself. What’s more, the potential for communication breakdowns is also greatly reduced when the entire process is managed by one business.

Complete access to information across the whole process offers opportunities to identify bottlenecks, improve efficiency, and optimise production. With the technology of automation ever evolving, it’s possible to greatly improve productivity by automating many of the elements of the production line.

Nimble problem-solving

There are obvious benefits in being able to view the entirety of the job holistically. By maintaining control of all the steps of production, it’s simpler to respond to issues and solve problems as they occur. The ability for greater communication between people involved throughout the process can really reap dividends.

You'll also find that understanding the entire production process in detail enables you to gain greater insight into your customers’ needs. This makes it easier to anticipate their future requirements and could even result in the creation of patents and other intellectual properties.

Reduced costs

This one’s a no-brainer. Increased control over your supply chain should significantly reduce the cost of processes that were previously subcontracted. Instead of factoring their profit margin into your production costs, it can become part of yours.

As your business grows larger, through vertical integration, you can also achieve economies of scale, which will further increase profitability.

Competitive advantage

The improved efficiencies and lower costs associated with vertical integration should put you in a better position to compete in the market. By reducing costs on transportation and other operational expenses, you’re likely to be able to offer lower prices that'll attract customers. While the increased stability and speed of production you’ll enjoy can only improve your brand’s reputation.
The disadvantages:

Significant investment requirements
This is the most obvious, and the most important, factor to consider. Adopting a vertical integration strategy requires high capital investment. New equipment, additional staff, larger premises, and a more complicated organisational structure could all be needed.

It’s vital to ensure the necessary cash flow is there and that your return on investment (ROI) makes sense. Consider hire purchase or leasing options on equipment to keep capital costs low.

Introduce new processes in stages. Perhaps consider introducing edge preparation if you haven’t done it before. Or you might contemplate the addition of coating applications. You don’t have to add everything at once.

Greater exposure to market volatility

With greater investment comes the potential for greater impact if market conditions change. An unexpected slowdown in demand, as seen by most businesses during the pandemic, will be felt even more strongly at a larger organisation.

Reduced supply chain flexibility

While it may seem attractive to bring every step of a production process in-house, it does reduce your options. You no longer have the luxury of choosing between competing suppliers that are tendering for your business. You may find that matching the expertise of some subcontractors requires a level of investment in equipment and personnel that doesn’t make sense financially.

The productivity impact through the learning curve

It’s going to take time to work through the issues that occur when introducing production processes that you haven’t attempted before. Investing in acquiring the expertise you need to succeed is helpful, but you should be prepared for, and have plans to mitigate, the teething problems that come with exploring new disciplines.
The final decision:

There are benefits and drawbacks to the strategy of vertical integration. The drastic effects it can have on your business requires you to give it serious thought before moving forward.

But if you’re in a strong financial position with future projections looking good, it can provide an excellent basis for growth and increased profitability.
ANCA. Vertically integrated.

In the interests of full transparency, it should be pointed out that we at ANCA have fully embraced the benefits of vertical integration. We're the only tool and cutter grinding machine company in the world that designs and manufactures the complete machine, including building the CNC, precision motors and spindles, and polymer concrete bases, in-house.

This means our customers enjoy the benefits of a manufacturer that understands their product completely, stands behind the quality of every element, and is uniquely positioned to custom design both hardware and software to suit a client's individual needs.

We certainly think vertical integration is a pretty powerful attribute.

8 February 2022