Vertical integration means consolidation of the supply chain under one roof. This would include everything from product design to manufacturing to raw material management. The most famous example of this was the Carnegie Steel Company in the early 1900’s that supplied industrial steel. Carnegie owned the steel manufacturing plant, but also owned the steel mills and the ore mines. On the processing side of the organization, steel manufacturing replied on coal for heat so the Carnegie company owned the coal mines and refiners, plus a shipping company to transport raw material in and finished goods out. Sounds like a great deal, eh?
Managing these types of organizations require a whole lot of diverse skills in different industries, all coordinating for a common goal. While this might sound hard, I’m sure it is harder in practice! Unless each leg of the firm is perfectly sized to manage the flow, bottlenecks are bound to happen. To complicate things further, the material demand must be very flat an steady or the internal supply chain will not be flexible enough to be effective. Payroll and admin on top of all that? No thanks.
The contemporary approach to organizational management employs a strategic outsourcing plan in order to maintain the activities an organization is good at, and hire out the rest. Outsourcing often gets a bad rap in business, particularly from the employee level that are worried about their individual jobs. In practice though, it just makes sense. Why should a design firm staff up and concentrate its efforts on manufacturing? Design staff have a unique skillset and a certain work lifestyle that should be catered too to attract and maintain top staff. Manufacturing teams have a different set of requirements and environment, so it has to be straining on an HR team to build policies, procedures, facilities and other internal programs to accommodate both groups? Wouldn’t it be better for the company to decide who it wants to be, then put all its effort into being the best at it? If design is the goal, it would seem that the organization should be better off teaming up with an organization that specializes in Manufacturing to take on that task is a more effective way than it could do on its own.
Continuing on with the design firm, farming out additional steps in the design process may also be considered, such as prototype development, including fabrication and rapid prototypes. Unless the firm is large enough to keep a machine shop busy or pay the overhead to maintain SLA machines, why not farm that out?
Where outsourcing cam become problematic is when the core business activity gets outsourced, either in whole or in part, or when outsourced activities begins to erode the internal culture fo the organization. From an outsider perspective (I claim ignorance to the whole situation), it seems like Boeing may have gotten itself in trouble when it decided to outsource the engineering work on the Dreamliner project to outside firms. Boeing is a design and engineering firm, so outsourcing that activity to multiple groups seemed like a good way to lose focus and control over the entire design. The end result was recoverable, but painful during the first builds when parts didn’t exactly fit together the way they should.
From the company culture front, outsourcing internal support groups such as IT or HR might sound good on paper since those activities are mainly common across multiple organizations. In practice though, employees may be annoyed when computer problems are not addressed by a local representative who is familiar with the people and systems. Likewise with HR, this is an area that requires a personal touch rather than a computerized voice and touch-tone inputs.
Upsides of outsourcing? Besides allowing an organization to focus its energy on it’s core competency, outsourcing also allows a greater level of flexibility in its capacity. Manufacturing peaks to lulls can be accommodated through a Contract Manufacturing organization because that firm should have staff on standby from other clients. In other words, the CM has a large pool of staff that can be shifted around between the firms it services to account for micro-peaks in demand. Macro-level variation are still an issue, but CM’s are better equipped to manage hiring pools for the level of employees required to do the work. That are good at that, see how it all works?
There are not many Carnegie Steel Companies out there anymore, which should be pretty telling all on it’s own.
Is your firm outsourced? I know it’s a hot button, but what are your thoughts?