Question

Currently your plastic production business purchases raw materials from the co-located supplier through pure market transactions. However, there are other ways to go about sourcing raw materials. Please rank the four alternative options below from least (vertically) integrated to the most integrated. That is, the transaction relationship ranked at the top should represent the least vertically integrated business relationship among the four options.

A) Signing a long term contract with the supplier

B) Making the supplier your subsidiary

C) Completely owns the supplier's business

D) Forming strategic alliance with the supplier

Answer 1

Solution:

Vertical integration is a kind of arrangement of a supply chain for production by a company. From least to most integrated firms, we can arrange the four options in following way:

A) Signing a long term contract with the supplier: Under this case, business enters into a long term contract with the co-located supplier, for plastic production; so the two are vertically integrated with a time duration, making it least integrated form (notice, both are still independent bodies).

D) Forming strategic alliance with the supplier: When such a strategic alliance is formed with someone, it means a set of agreed upon objectives has been signed. Since, this alliance can go for long time period, maybe the entire life of business itself, it makes the integration stronger as compared to long term contract (still independent bodies).

B) Making the supplier your subsidiary: This exhibits more power of the business over the supplier, as the actions can be controlled of the suppliers. So, even stronger integration.

C) Completely own's the supplier's business: Clearly, as the name suggests, since the plastic production business has bought the supplier's business, now they are no more independent bodies. All decisions regarding the raw material supply is being taken within the firm, so this showcases the strongest vertical integration.