Benefits of backward integration. Backward Integration: Definition and How it Works 2022-11-08
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Backward integration refers to the process of a company acquiring or developing the capabilities to produce the raw materials or components that it uses in its production process. This strategy can provide a number of benefits to a company, including improved quality control, reduced costs, and increased control over the supply chain.
One major benefit of backward integration is the ability to exert greater control over the quality of the raw materials or components used in production. By producing these inputs in-house, a company can ensure that they meet its specific quality standards and requirements. This can be particularly important in industries where the quality of raw materials or components can significantly impact the final product, such as in the food or pharmaceutical industries.
In addition to improving quality control, backward integration can also help a company reduce costs. By producing its own raw materials or components, a company can potentially lower the price it pays for these inputs and increase its profitability. This is especially true if a company is able to achieve economies of scale in the production of these inputs, which can occur when the company is able to produce a large volume of raw materials or components at a lower per unit cost.
Another benefit of backward integration is the increased control it provides over the supply chain. By producing its own raw materials or components, a company can be less reliant on external suppliers and therefore less vulnerable to disruptions in the supply chain. This can be particularly important in times of crisis or when raw material prices are volatile.
In summary, backward integration can provide a number of benefits to a company, including improved quality control, reduced costs, and increased control over the supply chain. While it can be a significant investment, it can also offer long-term advantages that can help a company achieve a competitive advantage in its industry.
Backward Integration: Meaning, Examples And Advantages
In addition, a company that controls its own supply chain can more easily coordinate the production process and reduce waste, leading to further cost savings. Some organizations use a backward integration strategy when they feel a supplier has too much power over them. By producing its own raw materials or intermediate products, a company can avoid the markups and other costs associated with purchasing from external suppliers. A furniture company buys forests to obtain wood and make its own furniture. Some of the most well-known examples of backward integration include Apple Inc.
There are basically two types of vertical integration strategies that companies can utilize. If you are running into quality issues, for example, you can look to correct those problems yourself without needing to involve another firm. For instance, a retailer might purchase a manufacturing company and have access to proprietary technology as well as resources or patents that are solely available in the local area of the firm. However, there are more specific advantages of backward integration, some of which are as below. It is a kind of forward movement down the supply chain where companies try to get closer to the customers by extending their operations into distribution and retail. Starbucks uses a vertically integrated supply chain, which means that the company is involved in every step of its supply chain process, all the way from the coffee bean to the cup of coffee sold to consumers.
What is Backward Integration? Benefits, Overview & Examples
Either way, companies can become responsible for providing their own raw materials and supplies. What is forward integration? In forward integration, the company acquires or merges with a distributor. This is part of the reasons why President Muhammadu Buhari inaugurated the industrial council that would bring together leaders and players in both private and public sectors in order to boost industrialisation. Here, the manufacturer is buying or setting up businesses to distribute its products. The National Council on Commerce and Industry NCCI held a meeting in May 2010 in Kano and deliberated and accepted the measures proposed in the NSMP and recommended same for the consideration and approval of the Federal Executive Council FEC. For smaller companies, therefore, backward integration may not be possible.
5 Reasons to consider backward vertical integration
Backward integration involves a company taking over operations for which higher supply chain participants were responsible. This can lead to improved product quality and customer satisfaction. Vertical integration is of two kinds—forward and backward Integration. However, they may also relate to this specific strategy. A few fortunate companies, like Microsoft and Apple, have excess cash on their The state of corporate culture in U. Starting from the suppliers from whom the company obtains raw materials, the chain moves downstream towards the distributors and the retailers.
There is also the risk that a company may become too reliant on its own production capabilities and become less flexible and adaptable to changing market conditions. Suppose the number of suppliers of a company is low and the company does not have many sources to obtain raw material from. What is the meaning of backward vertical integration quizlet? If for example there is only a limited number of firms that provide the goods or service that you rely on, and this results in them charging a high premium for the good, then backward vertically integrating may remove your dependence on that supplier. In addition, a company that controls its own supply chain can more easily respond to changes in demand and adapt to market conditions. The dyke provides flood protection from the River Niger. It aims to populate the world with as many as 100 million disease-resistant trees by 2025. However, the process is not as straightforward.
What is backward vertical integration example? The chain stretches from acquiring raw materials to finally selling the products. You can negotiate for higher volume discounts. These activities could result in human capital issues. This the key difference between forward and backward integration. This process is fully about keeping operations within a supply chain.
Counting Benefits of Backward Integration in Sugar Industry
A final advantage that comes with backward vertically integrating is overall greater flexibility in making changes. Some companies use cash from equity capital raises. Backward integration can be used to reduce product costs, increase quality, and improve availability of raw materials and work-in-process inventory for manufacturing. Integration happens if a company moves upward or downward in its supply chain. She is a former CFO for fast-growing tech companies and has Deloitte audit experience. These include backward vertical integration and forward vertical integration. Backward vs Forward Integration The main difference between backward vs forward integration is that backward integration involves acquiring raw material suppliers earlier in the supply chain to increase internal production processes, whereas forward integration relates to buying wholesale distributors, last-mile delivery companies, sales, and services operators in the supply chain to discontinue outsourcing these functions.
And it has transferred the risk of reduced sales level in an economic downturn from the supplier to your business. Its sugar refineries are located in Lagos and Port Harcourt. Which Companies Should Use Backward Integration? There are some major benefits to be obtained from these strategies. What is the meaning of forward integration? Also, there will be cost implicated after backward integration to optimize the business operations. If you are able to become more knowledgeable in this stage than your suppliers who competitors rely on, you may be able to achieve a competitive advantage relative to companies with whom you compete.
Backward and Forward Integration: Benefits for Businesses
There are several strategies that companies may use to do so. It makes them slack off and makes them less productive. Reduce costs When suppliers deliver goods to a company, they charge a percentage of profit. Enclosed within a 35-kilometer dyke, the production facility area is 15,100 hectares, with a sugarcane area that features a maximum output of 10, 000 hectares. Companies with difficulty obtaining raw materials on time for a reasonable cost should consider backward integration. What company is an example of backward integration? Backward integration can have several disadvantages apart from its benefits.
Since raw materials represent a scarce resource for companies, they always aim to increase their control. Difficult to manage Backward integration can become difficult to manage. Backward integration can have several advantages for companies. If a company acquires these tech firms, it gets access to these technologies. It ends with the sale of the final product to an end-consumer. If the acquirer or merger partner has a completely different corporate culture style, some employees may voluntarily leave the company.