Business owners never rest on their laurels and are constantly thinking about how to expand their business. One possible scheme for this process is vertical consolidation. This involves controlling more than one level of the supply chain. It can include many subtypes. There are also other types of consolidation, and each has its pros and cons. In this article, we will look at the advantages and disadvantages of vertical consolidation.
Advantages of vertical consolidation
Vertical consolidation offers companies many advantages that would increase their competitiveness and profits:
- Proposes economies of scale
Economies of scale occur when companies reduce their unit costs. To do this, a business buys consumables in bulk and spreads the cost over more products. Another way to achieve economies of scale is to eliminate high intermediary markups, consolidate the management and streamline operations. So, companies can manage their distribution centers themselves, so their control over the distribution process would greatly increase. But of course, this effect would be much more difficult to achieve without modern technology. With their help, businesses could improve the loading and delivery efficiency of products. It would also be a big advantage to lower prices for customers.
- Preventing the creation of new profit centers
The largest and most successful online stores allow manufacturers to sell their products directly wherever and whenever the customer is. In this way, they create new profit centers. Renting and maintaining stores becomes unnecessary if people can buy your product without getting off the couch.
- Expands geographically
Vertical consolidation allows your company to create new physical distribution centers in new regions. This works best when the company is expanding in its segment.
- Maintains quality control
The more control you have over the manufacturing process, the greater the quality control is. You won’t have to worry about possible errors or unforeseen replacement of some element of your product.
- Distinguishes it from the competition
Vertical consolidation provides a unique opportunity to differentiate yourself from your competitors. You can become a retailer or offer something else that your competitors can’t yet.
Disadvantages of vertical consolidation
It is naive to assume that business scalability methods do not carry any risks. When it comes to vertical consolidation, these are:
- Possibility of damaging established sales channels
If you’ve been promoting your products through sovereign stores and later decide to set up your online sales to customers directly, you should be prepared to lose sales through your already established sales channels. Are you ready for these consequences?
- Loss outcome
Vertical consolidation can be costly, and expanding your supply chain will ultimately lead to nothing. It can take a lot of investment to keep distribution centers running with dignity, and besides, this expansion method is not as flexible as others. You can’t cancel it halfway through without consequences. As a result, a lot of your money will be wasted.
- Getting old due to new technology
This could be the most potential risk, but it is there nonetheless. Vertical consolidation can work during a company’s time when new technologies will begin to develop rapidly and become available. So, companies will have to re-invest, but now in new technologies and training employees to work with them to stay afloat in the market.
- Higher costs due to lower volume
There is a downside to increased quality control since you won’t be able to keep material costs as low if you create your product entirely yourself.