Vertical integration strategies for supply chain

June 4th, 2007 at 05:40am David Bush - Iasta

Reading through a recent Supply Chain News Bite, I was interested in the news from the metals market regarding Alcan and Alcoa merging and the impact on metals pricing.

According to SCD, “Commodity prices are famously volatile, and some believed that after a big run since 2004 increased supply coming on line would drive prices of metals back towards more historic levels. But the voracious demand from the surging economies of China and India make it tough for even growing supplies to keep up with global market demand, and many think these mergers will put even more of the balance in the producers’ favor by enabling them to better control supply. Additionally, cash spent to buy rival mines and production assets is money that can’t be spent on developing truly incremental capacity.”

This small article linked over to a bigger issue of Supply Management: The Return of Vertical Integration? which is older but had some very good information on limitations in supply and the strategies to follow. It seems vertical integration is becoming more in vogue again with many companies absorbing their own supply chains to control availability of tightly limited commodities. They referenced three examples:

• Bridgestone, the world’s second largest tire producer, bought an Indonesian rubber plantation in 2005. The Wall Street Journal quotes a Bridgestone executive as saying that the “company has determined that in the long term, the global appetite for these strategic raw materials will make it more and more difficult to obtain the quality and quantity of materials necessary for the efficient and profitable operation of the business.”
• Armored car and bullet-proof vest maker Armor Holdings last month acquired a supplier of super-strength fibers used in the manufacturer of these core products.
• Steel giant Mittal is buying up iron ore producers, and announced it will 82% self-sufficient in iron ore by 2010.

If you deal in markets that are impacted by these types of issues, this is a good article and opens the argument about the benefits of vertical integration of supply chains and the shifts back towards this thinking.

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Entry Filed under: General, Global Supply Issues/Risk