Supply Chain Operations Management Assignment Essay

Supply Chain Operations Management Assignment - Essay Example Ownership upstream towards suppliers and subsidiaries of inputs to production is known as backward vertical integration, while ownership downstream towards buyers and distribution centres is known as forward vertical integration. Figure 1: Vertical Integration (Source: PPT) The disadvantages associated with vertical integration in achieving economies of scale can be highlighted as: 1. The costs incurred in forward and backward vertical integration are huge and can be used to expand production activities which would contribute more towards profits than that contributed through integration. 2. The core management time gets more involved in managing diverse structure of the organization as a result of integration. Such time could otherwise be devoted to core activities of management and contribute to organizational profits. 3. It is argued that production capacities, as a result of vertical integration, may become so large that customer demand might fall short and hence, economies of sc ale might not be fully utilised. Also, a lot of production time might get wasted in meeting a definite customer demand, thereby reducing scope for optimum utilisation as well. This becomes a major disadvantage because as a result of vertical integration, fixed costs sharply become so high that in times of slumps in demand, a fall in production might lead to a greater rise in per unit fixed costs rather than variable costs. Such a scenario makes realisation of breakeven point near difficult. Question 1b It is suggested that vertical integration decreases costs, but when it is viewed from the organizational point of view, vertical integration leads to higher cost in terms of managing different new organizational departments and also, backwards integration tends to reduce efficiencies of suppliers by eliminating competition, thereby increasing costs. When a firm decides over vertical integration, it invests significantly in terms of investments in the organizational process. These inve stments arise out of forward and backward integration and are done on acquiring firms. Such costs are capital expenses. Huge expenses made during integration reduce a firm’s capability to stretch production capacity at least for some period of time. In an unpredictable market environment, such inflexibility can be quite serious and might lead to loss of market share altogether. During the process of integration, a firm invests in high cost machines which are necessary to carry out production activities of the acquired firm. In the slump demand scenario, the machine might not be utilised to the fullest or utilised at all. However, the acquiring firm has made expenses for the machine and the costs of which shall get added to per unit produce. Variable costs, on the other hand, are incurred per unit of good produced and can be reduced during slack in demand. Additionally, such costs cannot be shared with the consumer owing to competition. Hence, we see how vertical integration c ontributes to higher fixed costs and lower variable costs. In such a scenario, a firm can explore alternatives to vertical integration for eliminating the disadvantages associated with the integration process. Only after due consideration of the competitive environment, efficient scale of production of the prospective firm to be acquired and its alignment with the company’