Category: Supply Chain

Demand planning is one of those things you might not notice until it’s too late. When you don’t work out your expected demand in advance, the results can be devastating.

This is something Nike learned the hard way. Poor demand planning led to supply issues that cost Nike over $100 million in lost sales and dropped its stock price by 20% in just a few months. So what happened?

Basically, a supply chain software glitch created an erroneous demand forecast and led to the company overordering thousands of one type of sneaker and drastically underordering one of its best sellers.

And all of it was preventable with better demand planning.

While demand planning isn’t perfect, it can help ensure your inventory levels remain more consistent and help you save money. Combining that with supply chain management lets you ensure the right parts and products are where they need to be at any given time.

What is demand planning?

Demand planning is using data to predict the demand for specific products so you can set inventory levels and plan for supply needs. In other words, if forecasting predicts that you will need a certain number of a product to meet customer demand, planning is the process you use to know when and how much to order to meet the forecasted demand. It is the actual scheduling and actions taken to meet demand.

Demand planning is done after forecasting. Forecasting looks at the amount of supplies and labor available and ensures that your company doesn’t exceed these limits. This process involves gathering data from the company’s historical sales, consumer buying patterns, and market trends.

It then combines this information with variables like weather conditions, shipping issues, and lead times to get an accurate picture of future needs, like which items your team should order and the amounts.

Demand planning is:

• Putting in inventory orders for the correct items in the right quantities at the right time to prevent overstocking and stockouts.
• Making sure there’s enough space in the storage area for them.
• Ensuring there are enough cardboard boxes in the shipping department to get them out the door.
• Making sure that every section of the supply chain is ready and can process orders with as little downtime as possible and with the least amount of waste.

When demand planning is done right, the supply chain is humming. Inventory is at optimum levels, and orders can be filled in good time, efficiently, and with the least amount of expenditure.

Demand planning examples

So, theories are great, but what does it look like in the real world? Let’s look at some examples of demand planning in real life.

• Seasonal demand planning: If you run a seasonal business, like a swimwear business, you probably have most of your sales at specific times of the year. Using demand planning, you can look at previous years’ data to plan your wholesale orders and keep inventory levels adjusted to meet changing demand.

For example, you might need 100,000 more units for May and June, your busiest months of the year. You want to place these orders early enough, so you have the items in time instead of arriving in July when sales are starting to slow again.

Demand planning also helps you plan schedules to interview, hire, and train seasonal staff to be ready for the summer rush. You’ll also need to make sure you have enough shopping bags, shipping materials, and advertising materials.

• New product launch demand planning: When launching new products, you can use demand planning to analyze expected initial customer demands. You can survey potential customers to try and gauge interest levels in your new product, determine whether your pricing seems acceptable, and figure out how many units you should order based on this feedback. Then production can be planned based on the needed initial stock and the new product lead time to make sure you’ll be able to meet inventory levels starting day one of sales.

Demand planning can also help you plan out your timeline for your pre-launch advertising campaign. For example, if you find out that most people you’ve surveyed have no idea how to use your new product, you might want to spend more time advertising ahead of the launch to educate the market about what your new product can do.

• Status quo demand planning: You can also use demand planning in your day-to-day operations. By understanding your product lead times, you can reduce backorders by ordering new inventory at the optimal time for just-in-time restocking.

For example, if you regularly sell 500 units a month of a product, you want to have just that much stock, not 400, and not 600 on hand. Demand planning helps you more accurately judge when to order so that your inventory arrives as you need it.

Components of demand planning

Demand planning is a multistep process that involves looking at data from many sources. Let’s break the process down into 10 parts to help you create a more accurate forecast.

Analyzing sales data across multiple channels and locations

Analyzing the sales history across sales channels is a good place to start. You need baseline data to begin forecasting and planning. However, when you’re an omnichannel seller, gathering and analyzing all the sales data can take time and effort. Luckily, with all the great automated options available today, doing this manually is no longer necessary.

Cin7 inventory management software connects your online and offline sales channels, enabling you to access all the sales data at your fingertips. You can view the aggregated sales history of your customers from multiple sales channels on Cin7 Omni’s homepage dashboard in one easy-to-digest set of data.

Using this, you can easily understand the customers’ purchasing behavior, buying patterns, your best-selling products, and identify slow movers. You can also target your customers with relevant products based on their past orders.

Calculating inventory turnover ratio

Your inventory turnover ratio indicates how efficiently your company uses its inventory and your overall business performance. With Cin7’s insight tools and precise inventory and sales data reports, you can accurately measure Cost of Goods Sold (COGS) and inventory turnover ratio.

Knowing and monitoring your normal turnover ratio lets you spot problematic changes and intervene quickly by adjusting outstanding inventory orders if you find any excess inventory or a lag in your sales. You can also create competitive price structures with this data to stand out from the competition, meet existing customers’ demands, and attract new customers.

Independent demand

Independent demand is the demand you have for a finished product — how much of your product customers want. For manufacturers, this means finished pieces, and for retailers, it means the items shipped out to customers. Knowing the quantity needed of the end product is a crucial step in demand planning.

Independent demand can vary greatly by season and economic factors, and can be impacted by changes in fashion or the weather.

Dependent demand

Dependent demand, on the other hand, refers to the demand you have for the components that make up the finished product. For a manufacturer, the planners have to make sure they have all the bits and pieces and raw materials needed. If they don’t have every component ordered, your staff won’t be able to manufacture the right quantities of finished goods to satisfy the independent demand.

Cin7 inventory and production management software is a useful tool for dependent demand planning. It can generate a detailed Bill of Materials (BOM), an itemization of the raw materials needed to assemble particular goods and the quantities needed to fill a particular order.

Cin7 also creates weekly reports on both materials used and progress production, which allows you to check that your demand planning is on target. As a bonus, the cloud software can even instruct the machinery on the shop floor to start up, and it can do this as soon as it detects that stock is at the minimum level you’ve already set.

Monitoring the production process

If you’re a manufacturer, monitoring the raw materials, tracking the finished goods, and streamlining production time is vital for running a successful business and meeting your customers’ demands on time.

You also need to track the quality of your products and processes. To do this, many companies rely on statistical process control (SPC) software. Despite the recent drive in automation, however, many companies still manually enter data in Excel. In fact, so many still use Excel that even Microsoft tries to push users to swap to a different product, even though the one they suggest still requires a lot of manual work.

Instead of relying on outdated technology, automating your inventory and manufacturing processes can save you time and money. Automation helps reduce human error, reduces the need for frequent inventory counting, reduces revenue and manufacturing time lost from missing inventory, and reduces the staffing needed to manage your inventory and manufacturing processes.

Monitoring, tracking, and managing inventory

Strong inventory management that lets you know what you have on hand is integral to knowing what you still need to order.

With Cin7’s inventory management software, you can readily conduct regular stock assessments to ensure your stock is in optimal condition. You can also assign a batch number or serial number to track goods more accurately under your preferred inventory method.

By tracking your inventory carefully, you can minimize the risk of your inventory aging out and sell goods at a greater profit margin. The right inventory at the right levels, location, and condition ensures a smooth supply chain at every stage.

Cin7 also supports product bundling, enabling you to bundle relevant products and sell them at a competitive price. To top it all, you can also rely on Cin7 for managing your returns.

Internal processes demand

Demand planning is part of your Internal processes. It makes sure there’s no hitch in the supply chain on your end. Knowing the demand on your internal processes is also about ensuring you have enough space in the warehouse or storage area to place items for those projected orders as they come in from the suppliers.

When your internal processes are well-defined and working properly, your warehouse can ship to the end consumer without delay. These processes should clearly spell out each stage of the delivery process, so when someone asks, “What’s next?” there’s always a clear next step to take, whether that’s how an item is packaged, where it is stored in the warehouse, or what shipper is used.

On top of knowing your processes, this also means you have things covered in an emergency, like enough spare parts to cope with machine breakdowns and staff to keep everything flowing smoothly.

Managing product portfolios

Demand planning requires businesses to understand their products and lifecycles from introduction to phase-out.

Your product portfolio includes every product your company sells, including details like their market share, how the product is growing, and information on the customers. Your products are often interconnected, and the sale of one product affects the sales of another.

Maintaining a product portfolio is helpful, especially when you add new products to your portfolio, as it helps you understand how the new product impacts the sale of existing products. You want to be careful not to cannibalize another product, make sure each product aligns with your business goals, and have a clear overview of how each product is performing at any given moment.

Analyzing current trends

Besides internal factors, external factors outside of your control, like weather, staff health, and economic events, impact business performance.

Having a dedicated team to monitor external data on current events like recessions or natural disasters and develop contingency plans will help your business adapt to market volatility and prevent possible supply chain disruptions.

A transparent system will help you stay connected with your suppliers and track your goods during uncertain times.

Managing trade promotions

While marketing and promotions may seem unrelated to demand planning, arranging for advertising, discounts, and giveaways is an actionable part of the sales cycle and should be included. Publicity attracts interest and helps sell your products and goods, so it directly affects demand.

While Cin7 is primarily a connected inventory software, it can also help set up discounts, set start and end dates for a particular promotion, and apply those promotions to whichever of your products you choose.

Demand planning and supply chain management

Demand planning has a big impact on supply chain management. We’re only a couple of years post-pandemic, with supply chain disruptions still affecting many countries, a possible recession looming, and drastic changes in demand becoming more and more common.

Strong demand planning helps you manage your supply chain by:

• Streamlining inventory management.
• Putting relevant sales strategies in place.
• Ensuring efficient use of all resources.
• Encouraging companies to negotiate with suppliers for better deals.

When you manage your demand effectively, you are able to react to both internal and external factors much more quickly. The National Retail Federation forecasts that sales in the US will grow 4-6% in 2023, reaching a total of $5.13 trillion. In order to meet these levels, retailers will need to grow their inventory levels as well, but this growth won’t be linear.

Companies need to carefully track their demand and adjust inventory based on changes in their supply chain as well as customer demand. Using a connected inventory system will help you do this accurately and quickly.

Wrapping up

Having the right amount of inventory in place when it’s needed is at the heart of a well-run business, and it’s why getting demand planning right is so crucial.

Cin7’s inventory software helps maintain flow from one stage of the inventory process to another. The software has features that can make supply chain management hassle-free, and the data it produces can be put towards forecasting and, as a result, better demand planning.

To find out more, schedule a demo with one of our experts today.

Fulfilling a customer’s order is more complex than picking and shipping products off the shelf. The process starts long before that. Businesses must consider getting the parts or inventory into their warehouse, sorting everything out, and tracking inventory to ensure they’re well-stocked. They also need to ensure that their shipping schedules operate at a sufficient pace to get products to customers quickly.

Order management software is a powerful tool businesses use to streamline and automate their order fulfillment processes. It enables efficient order management from initiation to final delivery. This software centralizes and organizes all order-related information, customer details, product inventory, and shipping information. By integrating with various systems, such as e-commerce platforms and inventory management software, order management software provides real-time visibility into order statuses, inventory levels, shipping updates, and more.

Order management software additionally provides industry-specific benefits to business owners in different sectors. Some include:

• Retailers: OMS allows retailers to manage, track, and fulfill orders from many different sources, like brick-and-mortar stores, online marketplaces, and other e-commerce platforms.
• Manufacturers: OMS allows manufacturers real-time visibility into orders and inventory levels.
• Wholesalers: OMS lets wholesalers easily track available stock, monitor replenishment needs, and avoid stockouts or overstocks.
• E-commerce businesses: OMS empowers e-commerce businesses to centralize all order-related information, allowing companies to manage orders from multiple sales channels in one place.

While an order management system will benefit your business, some solutions make more sense than others, and some come with advanced features that make your day-to-day operations easier. Here are the 11 best order management software options, details on who they’re best suited for, their prices, and key features.

Methodology: To compile our list, we weighed software that serves different markets, the features of each, their prices, and their user reviews.

Best order management software solutions in 2023:

• Cin7
• Brightpearl
• IBM Sterling
• QuickBooks® Enterprise
• monday.com
• Zoho Inventory
• Veeqo
• SAP Commerce Cloud
• Salesforce Commerce Cloud
• Katana
• Sana Commerce
• Benefits o an order management system
• What is the difference between CRM and OMS
• How to select an OMS

1. Cin7

At Cin7, we set ourselves apart from competitors by offering two strong products with robust order management capabilities. Cin7 Core, our comprehensive small business solution, automates tasks like data entry and reordering, so you can spend more time running your business. The software also works as a strong point of sale (POS) solution, allowing you to easily track your sales, find new customers, and manage sales from anywhere.

Cin7 Omni, our tool with native EDI & 3PL integrations, elevates order management for small and midsize businesses by connecting products, sales, orders, warehouses, and more in one centralized and automated solution. With your orders living in the same place as the rest of your business data, you can focus more on creating value for your business rather than digging through spreadsheets.

We believe in our tools and their ability to help customers achieve their business goals. See what Software Advice and Forbes say about our software.

Best for: Small and midsize businesses looking to move their order management process from spreadsheets to a centralized platform

Pricing:

• Core
  • Plans start at $325/month
• Omni
  • Contact us for pricing options

Key features: Automated inventory replenishment, e-commerce order downloads, 3PL pick requests, automated purchase orders, Amazon order management

2. Brightpearl

Brightpearl allows businesses to manage order fulfillment with ease so more resources can go into business development. With various fulfillment options ranging from dropshipping to multi-location fulfillment, Brightpearl can be an effective option for various product sellers.

With multi-channel integration, Brightpearl makes it easy for product sellers to integrate with their preferred sales channel. But while Brightpearl can help product sellers reach more customers in different markets, it falls short in providing insights into sales numbers.

Best for: E-commerce brands looking for a scalable order management solution

Pricing: Available upon request

Key features: Plug-and-play e-commerce integrations, automatic sales channel updates, automated stock replenishment

3. IBM Sterling

Designed to give large organizations the ability to centralize order management across platforms, IBM Sterling is a strong choice for companies looking for a tool that can simplify more complex product order management processes.

Described by IBM as a “single source of truth” for companies that use various sales channels, IBM Sterling works to centralize order information, allowing enterprise companies to manage all their orders in one place.

Best for: Large companies looking to simplify complex product order management processes

Pricing: Available upon request

Key features: Automated sourcing decisions, multi-location inventory management, enables transfers in the event of a stockout, uses aggregated inventory information for order fulfillment

4. QuickBooks® Enterprise

QuickBooks offers a comprehensive order management feature within their Enterprise tool that allows businesses to manage order fulfillment within one system — simplifying order entry, invoicing, payments, and more.

While the tool is an excellent way for businesses to streamline inventory and order management, advanced inventory management features are locked to Gold users and only available to Platinum and Diamond users — making it a little more costly for growing businesses to access the full order management capabilities.

Best for: Product-based businesses looking for a scalable order management system

Pricing:

• Gold: $1,830/year
• Platinum: $2,250/year
• Diamond: $4,400/year

Key features: Simplified order entry, centralized order management dashboard, automated invoicing

5. monday.com

For businesses looking to easily track incoming orders and gain complete visibility into the order cycle, monday.com is a compelling choice. A comprehensive work and project management tool, monday.com offers several templates and tools that can help product sellers streamline the order process.

While monday.com offers many integrations that are prime for project management, it falls short in providing all the integrations to sales channels that product sellers may be interested in, making it difficult to reach new customers.

Best for: Small businesses looking for more management and visibility into the order cycle

Pricing:

• Free version (up to 2 seats)
• Basic: $8 per seat/month
• Standard: $10 per seat/month
• Pro: $16 per seat/month
• Enterprise: Available upon request

Key features: Order tracking dashboards, automated order updates, email integration, custom order templates

6. Zoho Inventory

Zoho Inventory is another good option for multi-channel product sellers, as it integrates with Amazon, Shopify, eBay, and Etsy to centralize product and order information.

With Zoho Inventory, you can also automatically print packing slips, generate shipping rates, and track shipments through the order process. Zoho additionally gives you insight into your most and least profitable items — so you can make data-driven decisions about which items to prioritize.

Best for: Solo entrepreneurs or small businesses looking to streamline their order process

Pricing:

• Free version
• Standard: $59 per organization/month
• Professional: $99 per organization/month
  • Premium: $159 per organization/month

• Elite: $239 per organization /month
• Ultimate: $329 per organization/month

Key features: Sales channel integrations, package slip creation, payment integration

7. Veeqo

Veeqo’s appeal comes mainly from it being a free tool, but it’s still a strong option for solo product sellers or businesses that are just getting off the ground.

Allowing you to print branded shipping labels and create custom invoices, Veeqo can help you create a name for your business — at no cost. Its reporting features can also give you insight into popular products, order history, and accounting.

Best for: Individual product sellers or young businesses looking to speed up the order process.

Price: Free

Key features: Bulk shipping label printing, branded custom invoices, sales reports, internal shipping notes, ability to reroute lost packages

8. SAP Commerce Cloud

SAP Commerce Cloud has a built-in order management feature that can benefit retailers and wholesalers looking for more visibility into stock and order tracking.

Built within the SAP Commerce Cloud’s order management feature is the Backoffice Order Fulfillment Cockpit, a dashboard that allows users to manage customer orders, review package information, and manage warehouses — providing a centralized view of all your order information.

Best for: Enterprise companies with complex product order management

Price: Available upon request

Key features: Automated order workflow, sourcing, order splitting, ability to view fraud reports, ability to pick, pack, and label shipments

9. Salesforce Commerce Cloud

The Salesforce Commerce Cloud includes an order management feature to centralize omnichannel sales in a single platform. The top CRM in the world, Salesforce’s inclusion of an order management tool makes it convenient for existing customers to handle all their resources in one place.

The main advantage of Salesforce order management is its ease of integration with its other products. If you use Salesforce for different business needs, like B2C Commerce or B2B commerce, your OMS will easily fit in with your other tools.

Best for: Existing Salesforce customers looking to streamline omnichannel order management

Price: Available on request

Key features: Order servicing, distributed order management, omnichannel inventory, automated order rerouting

10. Katana

Katana’s order management system simplifies order management for manufacturers — allowing them to automate manufacturing cost calculations using bill of materials data and gain complete visibility to the shop floor through a mobile app.

Additionally, the insights from Katana’s order management tool allow manufacturers to view all available raw materials and make sales and production decisions based on what is and isn’t available.

Best for: Manufacturers and e-commerce businesses looking for a centralized order management solution

Price:

• Essential: $99/month
• Advanced: $299/month
• Professional: $599/month ($799/month after the first year)
• Enterprise: Available upon request

Key features: Real-time data management systems, automated manufacturing cost calculations, shop floor visibility through a mobile app

11. Sana Commerce

Sana Commerce helps product sellers elevate their online stores by automatically creating custom product pages based on the products in your ERP and PIM system.

From there, the software uses its native ERP integration to ensure all changes made to product pages get reflected in your online store — allowing you to focus on driving sales rather than keeping tabs on your online marketplace.

Best for: Product sellers looking for streamlined order management and an elevated online store

Price: Available on request

Key features: Automatic language translation, automated returns, automated order editing, order tracking

Benefits of an order management system

Order management systems are not only helpful for you, but they can also benefit your customers and vendors. You’ve probably had some unfortunate instances in shopping yourself; maybe you’ve ordered an item only to find out later that the company sold out of that piece, or perhaps the company didn’t have very good order tracking, meaning you didn’t know where your package was until it showed up at your door.

With the right OMS, you shouldn’t have to stress about orders reaching customers on time, but there are more perks than that. Some other benefits include:

Better customer service

Customer trust isn’t built just by getting deliveries to a customer’s door. Consumers want to know the process end to end: From estimated delivery time to real-time updates in the shipment process.

Order management software significantly improves customer service by giving businesses real-time visibility on order statuses, shipment updates, and delivery tracking, allowing them to provide accurate and timely information to customers. By offering this, businesses can create a sense of transparency and trust with their customer base, encouraging them to make repeat purchases.

Improved vendor relationships

Order management software strengthens vendor relationships by streamlining communication and collaboration regarding vendor managed inventory (VMI). By facilitating order placement and providing clear insight into order fulfillment, OMS can help businesses maintain efficient communication with vendors.

OMS also allows companies to track vendor performance, monitor delivery times, and identify any bottlenecks in the supply chain. Order management software helps build strong and reliable vendor relationships by fostering effective collaboration and transparency.

Automated reordering

OMS allows businesses to automate inventory tracking, triggering alerts for low stock levels or potential stockouts and reordering certain products accordingly. Companies can improve operational efficiency, reduce carrying costs, and ensure timely order fulfillment by maintaining optimal inventory levels.

By automatically setting reorder levels for you, the right OMS will ensure that you never experience a situation where you can’t get products to customers.

Robust reporting

Order management software offers robust reporting capabilities that enable businesses to gain valuable insights into their order fulfillment processes. This software can generate comprehensive reports on various aspects, such as order volume and status, and insights into your most and least popular products.

With these extensive reporting features, businesses can identify trends, track performance metrics, and analyze operational efficiency. By leveraging these insights, companies can make informed decisions, identify areas for improvement, and implement strategies to enhance order management and fulfillment.

What is the difference between CRM and OMS?

Customer relationship management (CRM) and order management software (OMS) serve different functions. While a CRM focuses on managing customer relationships, an OMS prioritizes optimizing the order fulfillment process.

While OMS focuses on addressing the order fulfillment process and logistics, CRM is broader in scope and encompasses a more comprehensive range of customer-centric activities. Some solutions, like Cin7 Core, include both order management and basic CRM functionality –– including tracking leads and opportunities.

How to select an OMS

While industry-specific needs will undoubtedly play a role in deciding your OMS, you should consider certain universal elements when switching to a centralized platform. When browsing OMS, you should:

1. Ask about scalability

As your business grows, you’ll want an OMS that can grow with it. A good OMS scales with your business by accommodating increasing order volumes and expanding business operations. The best order management software should be capable of handling a growing number of orders, managing a more extensive inventory, and supporting additional sales channels.

2. Consider integrations.

If you’re a retailer, you’re undoubtedly using several different sales channels to reach your customers, so choosing an OMS that includes all the integrations you need to reach your customers is crucial. Ensure you’re selecting an OMS that integrates with all your sales channels to get the most out of your solution.

3. Look for specific features

Different industries may have unique requirements and processes related to order management. The best order management system should offer industry-specific features and functionalities catering to the business’s needs.

For example, those in the food industry might need features for managing expiration dates, batch tracking, and order freshness since they’re dealing with products with quick turnover.

What software is used for order management?

Finding an order management system is just one part of running your business effectively. One of the reasons these systems work so well is that they grant the ability to consolidate all your information in one place.

The best order management systems should free you from monotonous data entry and worry that products aren’t reaching customers and let you instead focus on adding value to your business. With a centralized solution like Cin7 Core or Cin7 Omni, you can streamline your processes and make sure you never miss a beat.

Ready to ditch spreadsheets and track orders more efficiently? Start your free trial of Cin7 Core to see what automated order management can do for you.

Businesses are always looking for ways to increase profit and expand market share. However, there are countless challenges that impede them from achieving this goal — pandemics, supply chain disruptions, delays from the suppliers, cutthroat competition, and more.

One of the best strategies to overcome these issues and increase profitability is to become more self-reliant. In order to control more aspects of production, Henry Ford, the famous founder of Ford Motor Company, purchased railroads, acquired coal mines, built a sawmill, and bought over 700,000 acres of timberland!

When businesses reduce dependency on intermediaries on distributors and suppliers, they can better control their supply chain and avoid disruptions. Vertical integration is a strategy utilized by famous companies like Amazon, Netflix, and Apple. After reading this article, you’ll understand how these companies use vertical integration. You’ll also see whether it’s suitable for your business or not. Let’s get started!

What is vertical integration?

There are many stages in the supply chain that facilitate a product’s journey to a consumer. First, the manufacturer gets raw materials from a supplier. After finishing production, the goods are sent to a distributor. The distributor then transfers goods to retailers, who finally sell goods to consumers.

Vertical integration is the process in which a business expands in order to gain ownership and control of more than one stage of their supply chain. In simpler terms, vertical integration is when a business attempts to perform production and distribution in-house instead of outsourcing it.

Vertical integration has been common since the industrial revolution. Andrew Carnegie was one of the pioneers — he owned iron mines that were utilized to mine steel resources for his company, Carnegie Steel. He also owned coal mines to get fuel for creating steel, and he owned railroads for transporting his materials. With this level of vertical integration, Carnegie created an entire ecosystem that helped him control his supply chain from production to transportation.

Types of vertical integration

There are three types of vertical integration: Backward integration, forward integration, and balanced integration. Let’s look at these concepts in more detail.

Forward integration

In forward integration, businesses expand, acquire, or merge with another business that’s “farther up” in the supply chain. For example, EA sports – a video game development company – relies on distributors to sell their games to customers. EA sports decided to acquire a retailer (Gamestop), which is an example of forward or “upstream” integration. Generally, forward integration aims to seek control over distribution.Backward integration

In backward integration, businesses expand, acquire, or merge with a firm “below” them in the supply chain. For example, IKEA – a DIY furniture company – needs wood to manufacture furniture. IKEA decided to acquire a wood supplier, which is an example of backward or “downstream” integration.

Generally, backward integration aims to seek control over supply or manufacturing of a product. That way, they’re able to source everything themselves. This cuts costs and makes businesses more self-reliant.

Credits

Balanced integration

Balanced integration is the combination of forward and backward integration. Through balanced integration, the company attempts to take control of both upstream and downstream activities in their supply chain.

The difference between horizontal and vertical integration

Like vertical integration, horizontal integration helps businesses expand and gain more control over the supply chain. Many people get confused between horizontal and vertical integration. After finishing this section, you won’t be one of them!

Examples of vertical integration

To better clarify vertical integration, here are some real-life examples.

Vertical integration example #1: Apple

Apple is a premium consumer electronics company that leverages vertical integration to scale its business. Apple performs backwards integration by owning manufacturing plants in San Jose, Taiwan, and more. They also perform forward integration by owning retail outlets (The Apple Store) that help them connect with their customers.

Vertical integration example #2: SpaceX

We all know that Elon Musk wants to colonize Mars and explore space. Like Tesla, SpaceX is one of Musk’s companies that manufactures rockets and spacecraft. SpaceX uses vertical integration to reduce the cost of space exploration.

At first, Musk wasn’t able to source rockets at an affordable price. After some research, he realized that it only cost 3% of the sales price to manufacture a rocket! This incentivized him to produce rockets in-house (backward integration). One of his competitors, United Launch Appliance, was charging $460 million for each satellite launch into orbit, SpaceX was able to achieve the same for just $90 million.  This is how vertical integration helps SpaceX offer their services for 5x less than their competitors.

Vertical integration example #3: Zara

Zara is a famous fast-fashion brand that has over 1,000 stores worldwide, and they are vertically integrated with their manufacturers and designers. While their competitors are at the mercy of independent designers, Zara designs in-house. This way, they can rapidly adapt to market trends. Because they own both retail and distribution, Zara is able to more efficiently manage their stock.

Vertical integration example #4: Ikea

Ikea is a do-it-yourself (DIY) furniture brand that offers ready-to-assemble furniture and fittings. Customers can choose furniture from Ikea stores and assemble it at home. Ikea primarily sells wooden furniture, so they purchased a Romanian forest and integrated vertically. By doing this, they gained more leverage on raw material production (backward integration), which in turn gives them more control over manufacturing and distribution processes.

Advantages of vertical integration

Most companies have realized how advantageous vertical integration is. Here’s why.

Advantage #1: Leveraging economies of scale

Economies of scale have an inverse relationship between cost and quantity. For example, if you increase production, the cost of producing each unit goes down. Whenever a business doubles its production output, the manufacturing costs fall from 70% to 90%.

So, how does an increase in production lead to a decrease in cost? When you manufacture goods in larger quantities, you place a larger order with your supplier. When you purchase items in bulk, you can get them at a discounted rate — which helps bring down production cost.

There are also some Technological benefits to economies of scale. As a company produces more of a product, they discover better ways to make the product. This leads to specialization and reduction of wastage.

Finally, there are also Governmental benefits, which is an example of external economies of scale. For example, there may be a shortage of oxygen cylinders at a time of medical emergency – like COVID – and the government may want to incentivize businesses to produce more oxygen cylinders. To achieve this, government can give tax benefits to the manufacturers to incentivize them to increase production. This would reduce the manufacturing cost.

When an organization adopts vertical integration, they achieve economies of scale by eradicating intermediaries and streamlining operations.

Advantage #2: Greater control over your supply chain

When a business is not vertically integrated, it depends on other parties in the supply chain. When and if there are supply chain disruptions, this can stop or slow down your operation. Through vertical integration, your business enjoys more control of the supply chain. You are able to maintain stability by solving problems external distributors can cause.

When you are not dependent on external suppliers and distributors, you’re better positioned to negotiate and do less business with suppliers who attempt to dictate the market. Protection of trade secrets is also easier when you’re not outsourcing manufacturing. Plus, by manufacturing on your own, you can shorten turnaround time and ensure that production quality matches your standards.

Walmart is an excellent example of this. Since they own their distribution centers, they have a massive amount of leverage. Walmart constantly experiments with emerging technologies such as augmented reality, drones, and hyperlocal distribution centers.

Advantage #3: More market knowledge

When retailers maintain direct contact with customers, they are better positioned to understand customer’s preferences. If you’re only a manufacturer, you focus solely on producing goods. Through forward integration, manufacturers are able to better understand customer behavior and calibrate their process to make products that are in higher demand. They can also create “knock-off” products of competitors’ best sellers to meet market demand.

By catering to customers’ needs and offering a better value proposition than other players in the market, fully integrated companies are able to win more market share.

Advantage #4: Better profit margins

Profit margin shrinks as more players enter your product’s supply chain. Successful vertical integration eliminates intermediaries and saves you money. By producing on your own, you’re able to leverage economies of scale and reduce your overall transaction cost. You can leverage these savings and even transfer them directly to your consumer by offering better deals. This strategy is commonly used by platforms like Best Buy and Walmart.

Advantage #5: Global expansion

Vertical integration allows you to beat your competitors. By opening your own distribution centers, you’re able to offer a superior customer experience. This is exactly what Apple did in 2001 when they opened their first retail store, and it helped them out-compete Microsoft.

For geographical expansion, companies can either acquire other brands or launch their own distribution centers. Louis Vuitton, a luxury fashion brand, became a worldwide destination for leather goods after opening stores in fashion capitals across the globe.

Disadvantages of vertical integration

Even though vertical integration is a great strategy for some of the most successful companies, there are some downsides. Let’s take a look.

Disadvantage #1: Massive upfront investment

This is by far the biggest drawback of implementing a vertical integration strategy. As a distributor, integration requires extensive capital. You need to invest in land, labor, and machinery if you want a factory. Building and maintaining production plants is expensive, too. And when a manufacturer decides to integrate forward to acquire distribution channels, they’ll need to invest in developing both their distribution centers and necessary personnel.

Disadvantage #2 Decreased flexibility

When a business is not vertically integrated, they have the flexibility to choose and replace vendors and distributors when a better alternative is found. When you attempt to do these tasks in-house, it’s a lot more tricky.

Since technology keeps on evolving, it can be expensive to adapt to trends and upgrade processes. Retraining employees on new technology requires a lot of time and money. If you’re not vertically integrated, you can simply source products from a different, more technologically up-to-date vendor. And you don’t have to worry about maintenance costs, either. Vertically integrated businesses may also find it difficult to outsource production to foreign factories with cheaper labor and operating costs.

Disadvantage #3: Losing focus

Running a distribution or retail business is a lot different than running a factory. Retail stores require sales and marketing personnel, whereas a factory requires people with engineering backgrounds. In an attempt to become a “jack of all trades,” businesses may lose focus and put valuable time and energy into places where they aren’t as skilled or experienced. This has the potential to lead to a worse product, declining profits, and worse.

Disadvantage #4: Antitrust and labor Issues

If you are the dominant player in a market and attempt to further control the supply chain process by controlling production, it can lead to antitrust issues. By trying to consolidate via vertical integration, you can face conflicts from both government and competitors. Vertical integration can also lead to labor issues, especially when a union company integrates with a non-union company.

Disadvantage #5: Intense competition

Doing everything on your own can increase profit margins,However, it often takes a long time to reach that stage. When you first set up your new production unit, you will make mistakes that can lead to manufacturing inefficiency and higher production costs.

You might also find it challenging to compete with existing players who outsource their production to companies that are both more experienced and cheaper. Vertical integration makes your business less flexible, too. Thus, vertical integration has the potential to backfire — resulting in the loss of your competitive edge.

Warren Buffet sums it up best: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Is vertical integration right for your company?

Vertical integration can help businesses increase profitability and provide better experiences for their customers, but it doesn’t come without its risks. When done right, however, the results can be amazing. All we have to do is look at Amazon, which has complete control over distribution. This allows them to offer quick delivery and lower transportation costs. By analyzing sales data, they’re also able to track best-selling products and create their own branded variants (AmazonBasics) — which is an example of perfectly executed backward integration. Amazon also offers a video streaming service called Amazon Prime, which improves customer experience and ensures recurring revenue.

Vertical integration can be a great expansion strategy, provided that the company has deep pockets and the ability to take risks and overcome challenges. Unfortunately, not every company can do what Amazon does. It’s best to find the balance that works for you. Should you focus on what you’re best at, and outsource everything else? Or is vertical integration the best way forward? Contact us for a Cin7 demo and gain advice, tips, and more information about your options.