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Vertical Integration

Vertical integration is considered as a way to increase competitiveness in the apparel and textile business. What are the perceived advantages of vertical integration – Cheaper products? Better quality? Quicker delivery? While only a few organizations treat every department together as a single business entity, maximum treat them as separate business entities. Can the perceived advantages be achieved if all are treated as separate entities or as a whole? Is vertical integration the way ahead for striving in the future…

Vertical integration – the term coined by Andrew Carnegie, has become the business model aspired by many organizations irrespective of the industry it is in. This approach towards apparel manufacturing is accompanied with benefits like better quality, cheaper products and lower processing times, however running a vertically integrated organization is not only about managing numerous departments but more importantly balancing the internal capacities as the inability to do so would cause underutilization or overburdening of a particular department. Hence, to tackle this scenario few organizations have started treating every department of their organization as separate profit-making centres, making them sole responsibility bearers of their profits & losses, inducing a sense of competitiveness. With everyone going their way in being vertically integrated, three major models have been noticed being followed by apparel manufacturers. The first being the most obvious one where an organization just produces enough to balance their internal capacities, and each department together comes under a single business. The second in line, is where an organization’s departments are independent business entities manufacturing and sourcing for and from an external business entity, parallel to catering to their own organizations internal needs, whereas balancing internal capacities is not on the agenda as such. The third model talks about organizations operating as a single business entity, and cost-effectiveness of their operations being the top priority, as outsourcing the same would be very expensive. Hence, there would be many variations like the ones discussed above, but the real question being, is vertical integration the way forward…

 

Vertical integration is definitely a better way to increase competitiveness and make a firm stand for garment manufacturers in the global apparel manufacturing sector. The main advantages associated with it are: better quality, better management of process flow and quicker delivery. When an organization has direct control even over the quality of the raw materials utilized in manufacturing of their finished product, the overall quality is bound to increase and stabilize. Also with all the systems in place under one roof, the process flows would streamline and the lead times would reduce. Also to mention is actually the way to strive forward into the future, if one is here for the longer run.

Talking about the cost-effectiveness an organization gains by becoming vertically integrated, I don’t think that it always results in reduced cost and that too for each process as being an export house many times we have noticed in-house operations are actually more expensive than what a job worker would charge if the task is outsourced. This is because as an export house we need to follow certain social and technical standards and practices which add to the final cost. One can’t encompass each and every little thing under its infrastructure.

I do not think treating the departments as a single or independent entity makes any difference; it is purely the decision of the management and how they want to run the show. Although in case of my organization, we view each business segment as an independent department.

RAJEEV BANSAL

Managing Director, Celestial Knits & Fabs Pvt. Ltd., Noida

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In my view, vertical integration has a significant impact on product price and its quality as well as it reduces the time involved in handling and shipment of the finished goods. It increases competitiveness of your products by lowering the transaction costs and also improves the delivery times, by synchronizing supplies along the chain of products. But for all this to happen, your systems need to be efficiently managed. As, when going for vertical integration one has to keep in mind that various segments have been added to the existing supply chain of the company, and one should be geared to manage it.

Needless to say, Vertical integration does give you a sort of strategic independence especially in times when important inputs are rare or highly volatile in prices, as if the raw materials required for manufacturing the finished product are quite expensive when brought from outside, it would be better to in-house the equipment necessary for manufacturing it, and the investment would obviously pay-off but in a longer run. Besides this, it also gives you more opportunities to differentiate by means of increased control over various inputs in terms of cost as well as quality.

Intangible benefits of vertical integration include, lowering of uncertainty levels within the supply chain to a great extent, as all the loop holes within the supply chain are streamlined and on the other side the buyers/clients get the one-stop-shop experience, leading to minimum hassles and maximum business.

If we see from an HR point of view, vertical set-ups greatly enhance learning across the processes and provide ample opportunities for cross functional experience as well as learning best practices across the value chain. These are the organizations which have the minimum attrition rates, as there are ample opportunities within the organization to grow and experiment with for any person.

V. K. GOYAL

Executive Director & CEO, SEL Manufacturing Co. Ltd., Ludhiana

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Vertically integrated company surely reflects the strength of the manufacturer. A buyer would prefer a vertically integrated company as they (buyer/client) would be able to work closely with the company right from the stage of fabric development that too much earlier in a season. Also a vertically integrated company can provide faster services in case of orders with shorter lead times. A buyer can fall back on such suppliers in case of “emergencies” as with everything at its disposal the organization has the flexibility to manage the systems in the desired manner. Also to mention the more the entities that are involved in a single order more of the time is wasted in follow-ups and communication.

Though each of the division of a vertically integrated company is treated as “separate business entity”, a buyer would still get a better pricing and service. Some benefits (in pricing) will surely be passed on to the customer, (commercial decisions).

Yes, vertical integration is the way ahead for striving in the future. However, I believe that both forms of organizations would co-exist, as a vertical organization cannot manufacture all varieties of fabric or garments within their setup and at the same time a non-vertical organization can claim to have the advantages of being flexible in sourcing a wider variety of material and goods across globe. So basically the fact is what suits best to an organization and its nature of business. Also to mention, there are quite a few buyers who work closely with the mills in fabric development and then nominate the mills’ fabric – for garment manufacturing. In such a working, the customers would prefer to work with non-vertical organizations. As at the end of the day it’s the customer who takes the call according to its requirements – service, variety and price. Hence, there is room for both ways of operations (vertical and shall I say “non” vertical) to co-exist.

 PIYUSH R. VYAS

Chief of Administration, Mandhana Industries Ltd., Bangalore

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It’s a very interesting question and important keeping in mind the present scenario as of today in our industry when prices, quality and delivery all play a crucial role. I do agree that vertical integration increases competitiveness, but it also helps in strategizing and controlling the pricing, in terms of cheaper products, improvement in quality and also aim for faster delivery as one has to rely very less on outside sources. This is only towards the product but for the organization as a whole, reduction in inventory stock levels, creation of a smoother workplace, reduction of space requirement and leaner production processes are some of the important benefits with the vertical integrated units, which ultimately lead to cheaper price, better quality and delivery.

However, to get better accountability in the organization, every department is often treated as a separate identity within the organization. As they are sometimes viewed as separate business entities, but it is only done for having improved accountability, better results and optimized performance. With the growing competition, price structure and quality in the industry, vertical integration is only the way ahead to have better control over the product.

AMIT GUPTA

Director, Om Sakk Industries, Panipat

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We chose to work on a vertically integrated business model due to the type of products made by us, i.e. equestrian apparels, which involve special fabrics and finishes, although available with any job-worker but not effective from the cost point-of-view. The main benefit of having a vertical integration business model apart from lower cost and ability to offer more value-added products is the ability to test-market new products without a high commitment to minimum orders. At JPC we have all the latest technology at our disposal which empowers us to do extensive Research & Development, only possible with a vertically integrated model. Also input substitution can be done with ease as new materials become available.

While only a few organizations treat every department together as a single business entity, most of them treat them as separate business entities. However, at JPV we have separate entities for accounting and business organizations. However, departments should be treated as a single business entity with respect to quality and efficiency planning.

Lastly, the only factor which strives a vertically integrated business model is the type of product manufactured by the organization and especially if manufacturing value-added garments like us, vertical integration becomes very essential both for development and production.

VARUN SHARMA

President, JPC-India, Noida 

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