Historically, the trend among companies in the manufacturing sector has been to do everything in-house, to be “vertically integrated”. This model is being challenged, driven largely by the need for economies of scale and greater asset utilisation, and the need to be on-time in the market with products. This need has created specialized companies across various horizontal layers. The Internet is helping tie-in these companies into closer companies, to create “virtually integrated” companies.
It is this virtual integration across the supply chain which helps companies like Dell and Cisco outsource much of their manufacturing, and focus primarily on design and marketing. BancBoston Robertson Stephens writes about this trend with reference to the Supply Chain Management in Electronics Manufacturing:
As competition has intensified over the past twenty years, we have witnessed a dramatic shift in the structure of the electronic equipment industry. Historically, original equipment manufacturers (OEMs) were largely vertically integrated, internally designing and fabricating the components and assembling and testing the final products. However, as the need to accelerate time-to-market and lower total costs has increased, we believe a much different business model is emerging today. We refer to this model as “virtual integration”.
This has spawned a relatively new industry called Electronic Manufacturing Services (EMS). EMS companies offer a vast array of products and services to accelerate time to market and time to volume for a broad range of OEMs. In doing so, EMS companies allow OEMs to reduce total costs, increase cash flow, conserve capital and focus on their own core competencies such as product design and marketing.
The Internet has cut geographical barriers to do business, and with supply chain management and optimization software made virtual integration easier. To succeed, companies need to become transparent and open with their systems. The onus to keep shelves in a supermarket stocked is now with the distributor, since its database can now be updated each time a sale is made at the supermarket. In this world, inventory is the result of lack of information across the supply chain.
Michael Dell describes the principles needed for successful virtual integration:
- First, seek to establish direct relationships that close the gap between customer, manufacturer and supplier.
- Second, define your own company’s value-add very tightly. Create partnerships for capital-intensive and labor-intensive services, and keep your own focus on doing what you do best.
- Third, choose best-of-breed partners and allow them to be part of your business — hold them to the same performance standards and quality metrics that you employ in your own business.
- Finally, think of the Internet not as an add-on to your business, but as an integral part of your company’s strategy. Only then can you use it to cross traditional company-to-company boundaries, to achieve virtual integration.
Thanks to virtual integration, closed business systems are giving way to collaborative relationships. B2B ecommerce is not just about finding the cheapest supplier halfway across the world; it is about using technology to build trust with suppliers, and deepening relationships with these trusted parties. In tomorrow’s world, competitive advantage will come from leveraging knowledge and process innovation.