Vertical integration in supply chains: driving forces and consequences for a manufacturer's downstream integration

Abstract

Purpose

Strategic concentration is a key issue for manufacturing companies when designing a supply chain. As a corporate strategy and a supply chain governance strategy, vertical integration relates to organisational economics and strategic supply chain management. Numerous explanations have been created for vertical integration, and transaction cost economics (TCE) provides a theoretical basis to help understand the process. However, the current popularity of vertical integration seems inspired by something more than altering industry structure and minimising cost, which are the traditionally accepted explanations for vertical integration This paper aims to explore the driving forces for vertical integration, particularly downstream integration of distribution, and the consequences of vertical integration in a manufacturer‐distributor‐reseller chain.

Design/methodology/approach

This study adopted an exploratory case study approach to examine a Swedish‐based timber manufacturer that vertically integrated a distribution centre in the UK, which made it a direct supplier to DIY retailers and builders' merchants. Data were collected primarily through open‐ended, face‐to‐face interviews.

Findings

The study found that the most important factors driving the manufacturer's vertical integration of distribution were the demands of large retail chains and the manufacturer's decisions to focus on developing its positioning strategy in the supply chain. Vertical integration has transformed the manufacturer into a supplier to large timber products resellers, offering the firm a greater potential to provide integrated solutions and, therefore, become a strategic partner to its customers.

Originality/value

This empirical study examined a building material distribution channel, a subject that has rarely been studied. Study results add empirical evidence to explanations and impacts of vertical integration, especially the integration of customer interface.

Citation

Guan, W. and Rehme, J. (2012), "Vertical integration in supply chains: driving forces and consequences for a manufacturer's downstream integration", Supply Chain Management, Vol. 17 No. 2, pp. 187-201. https://doi.org/10.1108/13598541211212915