The relationship of industrial organizations with their suppliers is increasingly critical, which has been largely recognized from a manufacturing point of view. What to buy, from whom and whether or not to buy components vs. systems is commonplace in most purchasing departments as they work strategically with other functions of the organization. The vertical integration of “innovation and/or engineering” is nevertheless not so much engrained. Imagine a company that historically developed all the drawings for their agricultural equipment. They would spend a lot of time developing – say – a pump for the hydraulic system of their products. Those pumps would be manufactured on a special assembly line at the supplier side. When we did the project, the supplier said: “Your pump design is 8 years old. As pump specialists, we have developed 2 generations of high-performance pumps, which are smaller, cheaper and provide higher performance levels than your design. And we produce thousands of them on our standard assembly line.” By moving from “build to print” to “off the shelf” for a critical but not special component, our customer saved millions of dollars.
Vertical Integration in the engineering world is a spectrum. Each category has its pros and cons, and the team will analyze which is the best cost/benefit for the application. We develop a “plan for every part”, in which we make sure that the best strategy is defined and executed to meet performance levels and ensure product differentiation, but at the same time optimize the leverage from suppliers with the best solution in terms of innovative components, engineering and product costs.
Components that are clustered into performance / non-performance relevant and into commodities can be challenged in terms of their vertical integration. Supplier capabilities also need to be taken into consideration.
After mapping the current level for each finished good and/or component, industrial organizations should develop a vertical strategy for each product/component cluster and be disciplined in its execution. That will produce great benefits for R&D, engineering and operations.