Virtual Vertical Integration: Innovation through Supplier Partnerships

“vertical integration is an arrangement in which the supply chain of a company is owned by that company…”¹

The industrial revolution created giant corporations and an onslaught of innovation and patents. Ford, DuPont, Dow Chemical, and others, all grew exponentially beginning in the late 19th century and through the 20th century, securing the U.S. as a powerhouse of industry and wealth.

Companies were vertically integrated: from concept to consumer, raw material to product; large manufacturers internally controlled all processes, materials, and supplies. Within this vertical integration, innovations were common occurrences, from customization of equipment to experimentation with new materials, a single company controlled the processes and employed the innovators.

When vertical integration and R&D became too expensive to compete in the global market, much of this ability to improvise and innovate throughout the process was lost. Suppliers were, and are, under constant pressure to reduce costs yet maintain and improve quality.

“The idea of vertical integration was taken a step further by Dell Computer, one of the most successful companies of the 1990s. Michael Dell, its founder, said that he combined the traditional vertical integration of the supply chain with the special characteristics of the virtual organization to create something that he called “virtual integration”…a tightly co-ordinated supply chain”.²

MEP and Virtual Vertical Integration

Virtual vertical integration teams between suppliers and buyers were recently demonstrated by BAE Systems in New Hampshire. Catalyzed by the New Hampshire Manufacturing Extension Partnership (NH MEP), the New Hampshire Aerospace and Defense Export Consortium (NHADEC), and the New Hampshire state’s Office of International Commerce, suppliers currently in BAE Systems’ portfolio were coached by the NH MEP and NHADEC to showcase capabilities and innovative new products to buyers of BAE Systems. These suppliers were able to have quality time within targeted product areas to discuss innovations and capabilities with BAE System and build a valuable relationship for co-creation.

NH MEP worked with Bae Systems to identify procurement needs and opportunities for supplier innovations. NH MEP identified smaller manufacturers who were currently or had been suppliers to Bae Systems and could offer additional capabilities for collaboration. The MEP Center then worked with the suppliers to focus on innovations and expanded capabilities that were matched to the BAE Systems procurement opportunities.

It is not likely the large corporations will return to total vertical integration, but there are successes sprouting up that are producing new innovations through deeper supplier-to-buyer relationships. Virtual Vertical Integration can be achieved through relationships between supplier and buyers that share visions for growth, and information to create the opportunities for innovation.

To learn more about NH MEP’s work, please visit www.nhmep.org.

¹https://en.wikipedia.org/wiki/Vertical_integration May 2016
²http://www.economist.com/node/13396061 May 2016