Supply Chain Management // Prof. Dr.

Wollny
Vertical and horizontal cooperation in a
Supply Chain

November, 9
th
2011

Supply Chain Management: Strategic Issues
Agenda
1. Introduction
2. Vertical Cooperation
3. Horizontal Cooperation
4. Conclusion

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1. Introduction: Development of Value Chains
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cf. Seuring & Goldbach (2002)
Business cooperation is generally a collaboration between mostly few juridically
and economically independent companies to raise the common competitiveness
Becker et al. (2011)
1. Introduction: Development of Value Chains
Triggers for rising cooperation in SC
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Increasing competition
Increased customer requirements due to the development from sellers to buyers
market (push pull)
Cost reduction and efficiency potentials are stronger in processes than in products
Outsourcing of operations with little strategic importance in order to concentrate
on own core competences
Lack of own (financial) resources
Bullwhip Effect
Modern technologies allow efficient networking between companies
1. Introduction: Objectives of cooperation
Improving costs, productivity and flexibility
Meeting the customer expectations
Generating synergies
Pooling the resources
Sharing specific strengths and capabilities
Sharing Know-How
Gaining an effective governance (only cooperation with centralized management)
Gaining of stability and sustainability of supply chains
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1. Introduction: Forms and fields of cooperation
Attributes Characteristics
Direction
horizontal vertical diagonal
Expansion
local regional national global
Duration
temporary unlimited
Fields of
cooperation
R&D distribution purchasing marketing production
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Forms of cooperation:
Service Agreements
Joint Ventures


Cooperatives
Consortia
Cooperative Agreements
Licensing
2. Vertical Cooperation
Companies of different stages of the value chain are working together

Aim: Gain a benefit out of the cooperation

Cooperating companies stay legally and economically independent

Can be limited to a part of business of a company

Cooperation are often limited in time

Types of cooperation
Forward cooperation: working together with companies closer to the final customer
Backward cooperation: working together with companies in the direction of
procurement


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2. Vertical Cooperation
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Vertical
Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity
producers
Forward
Backward
2.1 Vertical Cooperation: Alternatives
Vertical Integration

When a company expands its business into areas that are at different points of
the same production path
Types of integration
Forward integration: Acquisition of activities closer to the final customer
Backward integration: Acquisition of activities in the direction of procurement
Important factors: costs and control
The level of vertical integration depends on the relations with suppliers (form of
cooperation, type of contract)

Goal: Achieving the optimal vertical integration

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2.2 Vertical Cooperation vs. Integration
Common Advantages
Improve supply chain coordination (reduced Bullwhip effect)
Higher control over inputs and the whole Value Chain
Increase entry barriers to potential competitors


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Integration
Reduce transportation costs
Participate upstream or downstream
profit margins
Lead to expansion of core competencies
Decreased flexibility



Cooperation
The company remains independent and
therefore flexible
Easy exit of cooperation
No high capital investments required
Risk of Know-How outflow
High dependency on strong partners
Common Disadvantages
Higher coordination costs
Lack of supplier competition higher costs, less efficient


Differences
2.3 Vertical Cooperation: Example
Vertical Cooperation: Toyota

Supplier Organization (Level of responsibility)
1
st
Tier Supplier: In depth relation ship to Toyota
2
nd
Tier Supplier: Produce individual parts
Scale of Cooperation
Product development teams
Cross-sharing of Personal (Workers and Mangers are exchanged)
Sophisticated communication between Toyota and Suppliers
Suppliers are Partners
Build up and training of suppliers
Focus on long term relationship
SCM Concepts in use
Kaizen
JiT



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2.3 Vertical Cooperation: Example
Advantages for Toyota

Integrated system (JiT)
High quality
Shared development costs
Cost reduction
Secured supply
High influence on suppliers

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Advantages for Suppliers

Economies of scale
Constant orders
Know-How transfer
Shared development costs
Shared financing
Not easily replaceable
2.4 Vertical Integration: Example
Vertical Integration: Starbucks

Overview
Biggest Coffee House Company in the world
About 17,000 Stores in over 50 countries
Mission: To supply the customer with ...the finest coffee in the world...
Past strategy:
Buy beans from Suppliers, ensuring quality via high price (incentive) and quality control
Bean Roasting fully integrated into the Supply Chain, to grant top quality coffee
New strategy
Complete backward integration
Purchase of a coffee-bean farm in china
Training and educating employees
Ensure quality with own farms and Know-How








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2.4 Vertical Integration: Example
Reasons for Starbucks decision
Opening of the Chinese Market and the continues rapid growth
Limited supply of high quality Arabica beans
Increasing prices (+50% in price for Arabica beans)
Direct control of quality in all stages of production
Ability to maintain perfect quality through-out the whole value chain
Ability to control the full customer experience
Control of the moral hazard issue (bad reputation of coffee production)


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3. Horizontal Cooperation
Two companies of the same industry and in the same stage of production work
together

These companies belong to the same supply chain stage and normally produce or
trade the same products

Firms add their strength to gain benefits

Affects the processes and structure design of distribution networks

Cooperation creates a change of existing hubs

Requires inter-firm coordination



3. Horizontal Cooperation
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Buyers
Stores
Importers
Manufacturers
Suppliers
Commodity
producers
Horizontal
3.1 Horizontal Cooperation: SWOT Analysis
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Strengths Weaknesses
Cost sharing
Efficient allocation of
production
Production flexibility
Costs of coordination
Capital investments may be
necessary
Lack of control
Opportunities Threats
Using of partners Know How
Access to new markets
Customer acquisition
Transition of bad image
Choosing of wrong partner
for long-term cooperation
EU competition rules
3.2 Horizontal Cooperation: Examples
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Joint Venture

Set up a completely new company

Legally independent

Companies give their resources to the new founded Joint Venture

Example: VW Sharan and Ford Galaxy

Development and production identical

Aim: Cut down costs


3.2 Horizontal Cooperation: Examples
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Strategic Alliance

Strategic relationship between two or more companies

Join the individual strengths to follow common goals

Concentrated on certain business segments

Example: Star Alliance

Strategic Alliance of 27 Airlines

Coordinate their flights to cut down the travel time of connected flights


4. Conclusion
Globalization and scare resources require more control over the supply chain
High level of competition requires better cost efficiency
Others drivers are:
Political and trade barriers
Investment barriers
Competition
Enter new markets
Companies internal situation (Financial and labor situation, Know-How, etc.)

Both cooperation and integration are strategic approaches that meet those
global challenges
There is no universal solution: The choice of strategy depends on the
individual situation of a company
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Thank you for your attention
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Bibliography
Beckmann, H. (2004). Supply Chain Management: Strategien und Entwicklungstendenzen in Spitzenunternehmen. Berlin: Springer Verlag.
Becker et al. (2011). Netzwerkmanagement: Mit Kooperation zum Unternehmenserfolg. Berlin: Springer Verlag.
George Von Krogh,Johan Roos (2000). Managing knowledge: perspectives on cooperation and competition
Hertel et al. (2011). Supply-Chain-Management und Warenwirtschaftssysteme im Handel. Berlin: Springer Verlag.
Rderstein R. (2009). Erfolgsfaktoren im Supply Chain Management der DIY-Branche. Wiesbaden: Gabler Verlag
Seuring S. & Goldbach M. (2002). Cost Management in Supply Chains. Heidelberg: Physica-Verlag
Sunil Chopra, S./ Meindl, P (2007): Supply Chain Management. Strategy, Planning, and Operation, Third Edition.
Wannenwetsch, H. (2005). Vernetztes Supply Chain Management: SCM-Integration ber die gesamte Wertschpfungskette. Berlin: Springer
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http://www.investopedia.com/terms/v/verticalintegration.asp#axzz1cHvyisYa
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http://www.12manage.com/methods_vertical_integration_de.html
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EU Guidelines on horizontal cooperation agreements
http://blogs.hbr.org/hbr/mcgrath/2009/12/vertical-integration-can-work.html
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http://www.independent.co.uk/news/business/news/starbucks-to-more-than-double-store-opening-rate-2132888.html
http://www.economics.phil.uni-erlangen.de/bwl/exist_gr/koop.pdf
http://www.wirtschaftslexikon24.net/d/kooperation/kooperation.htm
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