Vertical integration allows two companies to create a value chain that benefits both parties by sharing costs and risks. It can be advantageous in guaranteeing raw materials and in the distribution process, resulting in higher profitability for both the supplier and customer.
A vertical integration is the coming together of two companies to create a value chain that allows all parties to enjoy the benefits of the business and share the costs and risks. Several factors can be the motivation to enter into a vertical integration, such as costs of goods and services produced or the market differentiation associated with each partner. The option to enter into a work contract of this type of call allows both parties to enjoy a faster service delivery with the distribution of a product and thus increase the profit margin by generating additional sales.
There are several areas where a vertical integration can be to the mutual benefit of both companies. One of these areas is the guarantee of raw materials for the production of goods and services offered by each company. Together, the two companies can embark on a joint effort to explore and purchase these materials. By performing this search and recovery task together, costs are kept to a minimum. This will result in a lower total cost per unit produced, which means more profit at the point of sale for the supplier and possibly a discounted cost per unit for the buyer.
Another area where vertical integration can be mutually advantageous is in the distribution process of end products. Both companies can work together to secure points of sale that will transport the goods produced by both entities. This can also allow partners to save money on distribution costs such as shipping, as well as help both entities break into a retail market that may have been closed to one or both companies in the past.
At its core, vertical integration can be an excellent means of managing a higher level of profitability for both the supplier and the customer. By working together, it is possible for the supplier to incur less cost in the production process and pass on part of the savings to the customer. At the same time, the customer works with the supplier to open up additional retail markets to their mutual benefit.
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