What is Backward Integration?

Supply chain efficiency is paramount in today’s world. With the supply chain management market expected to hit $45.2 billion in 2027, it’s clear that modern businesses are seeking new solutions to their supply chain woes. Backward integration has proved invaluable in lowering costs and driving efficiency. But what is backward integration, and how does it work?

What Backward Integration is

Backward integration is a strategic approach where companies expand their operations to include control over supply chain processes that they previously outsourced. In other words, they work backwards to gain greater control over the supply chain.

It often involves acquiring or establishing businesses that supply raw materials, components, or services that are essential to the company’s operations. By integrating these upstream activities, businesses basically streamline their supply chain, reducing dependency on external suppliers and potentially lowering costs.

Backward integration can take many forms depending on the industry and the company’s specific needs. For example, a smartphone manufacturer might acquire a semiconductor company to ensure a stable supply of chips. A fashion retailer could buy a textile mill to secure fabrics necessary for its clothing lines.

To get started, organizations typically identify the areas of the supply chain that are particularly vulnerable or costly. After thorough analysis and planning, the company may pursue acquisitions, mergers, or develop new capabilities in-house.

What are the Benefits of Backwards Integration?

Backward integration may seem like a lot of work, and make no mistake, it is. However, for many companies, the benefits greatly outweigh the downsides. Here are some of the reasons businesses pursue this approach.

Better Supply Chain Control

By integrating backward, businesses can gain direct control over their supply chain, allowing for better logistics management and ensuring a steady supply of essential materials. Best of all, companies can synchronize production schedules, thereby minimizing disruptions caused by supply shortages or delays.

Cost Savings and Increased Profit Margins

Are you looking to save money? Then consider backward integration. By eliminating intermediaries and producing raw materials in-house, you can lower procurement costs and avoid supplier markups. This, in turn, contributes to higher profit margins.

Improved Quality Control

Maintaining quality control in the supply chain is difficult for many reasons, from geographical dispersion to differences in technology. But if you’re the one controlling the supply chain, you can enact uniform quality control measures at every stage of production, making sure that everything is up to standard.

Greater Flexibility and Agility

The market can change quickly, and it’s important to be able to adapt to changes as they come. Backward integration makes it easier for companies to adjust production volumes to meet market needs without relying on external suppliers’ timelines. This agility can be a huge competitive advantage, especially in industries with volatile demand patterns.

Strengthened Bargaining Power

Less dependence on suppliers equals greater bargaining power. Businesses can negotiate better terms and prices with any remaining suppliers, leveraging their ability to produce inputs internally. This strengthened bargaining position can earn them more favorable contracts, further lowering costs.

Innovation and R&D Capabilities

While outsourcing is a great way to save time, it can result in businesses becoming lazy. They may not invest much time in R&D and innovation, which can weaken their competitive stance. By integrating backward, organizations can experiment with raw materials and production techniques to create new and improved products.

Risk Mitigation

They say you should never put all your eggs in one basket, but when it comes to supply chain management, you may want to think again. Reliance on outsourcing means that, in the event of supplier insolvencies or geopolitical issues, you’re left empty-handed. By controlling your own supply chain, you can create a more stable and predictable supply of materials.

Real-World Examples of Backward Integration

Backward integration is a worthwhile endeavor, but don’t take our word for it–look at the numerous organizations that have achieved greater stability and cost-efficiency by taking greater control of their supply chains.

Amazon’s Acquisition of Whole Foods

In 2017, Amazon made headlines by acquiring Whole Foods for $13.7 billion. In doing so, Amazon effectively moved backward in its supply chain by gaining greater control over the sourcing and distribution of grocery products. It streamlined supply chain operations and improved its distribution network, particularly for perishable goods.

Netflix’s Original Content Production

Netflix started out as a DVD rental company that distributed movies through the mail. Later, they began offering movies and shows via their streaming platform. To do this, they struck licensing deals and started producing their own original content. This not only led to higher profits, but eliminated the company’s reliance on other creators.

IKEA’s Forestry Operations

IKEA utilizes backward integration by acquiring forests and managing forest operations. In January 2018, they announced the acquisition of their first US forest property, an area covering 25,000 acres in Alabama. This acquisition and others like them have provided IKEA with a steady and sustainable supply of wood.

Drawbacks and Considerations

What is backward integration without its downsides? Though it offers several benefits, it does have some drawbacks. One of the primary challenges businesses encounter when implementing this strategy is the upfront investment required to develop upstream capabilities.

Another major obstacle is learning how to manage more complex operations. Backward integration often requires businesses to manage areas outside their traditional expertise. This can reduce efficiency and lead to greater operational challenges if not addressed promptly.

Incompatible platforms and technologies can also spell trouble for businesses getting started with backward integration. This is especially true for companies with old or outdated systems. Migrating to the cloud is key to getting tools and systems up to speed and ensuring they’re capable of handling all that comes with backward integration.

Understand What Backward Integration is With Cloudficient

There’s a lot that goes into backward integration, and doing it successfully requires a strategic approach. You can get started by making sure your systems are ready for future transformations. At Cloudficient, we make it easy for companies like yours to migrate to the cloud so you can understand what backward integration is and achieve top results. To see how we can bring Cloudficiency to your migration project, contact us.

With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.

If you would like to learn more about how to bring Cloudficiency to your migration project, visit our website, or contact us.