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What Is Supply Chain Integration? - Definition & Overview

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  • 0:00 What Is Supply Chain…
  • 1:05 Integrating Supply Chains
  • 2:13 Advantages of Integration
  • 3:09 Disadvantages of Integration
  • 4:01 Lesson Summary
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Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

In this lesson, we'll discuss what a supply chain is, what integration involves and the good and bad of a closely coordinated, and integrated, chain of companies to fulfill customer purchases.

What Is Supply Chain Integration?

Supply chain integration is a close alignment and coordination within a supply chain, often with the use of shared management information systems. A supply chain is made up of all parties involved in fulfilling a purchase, including raw materials, manufacturing the product, transporting completed items and supporting services.

Supply chain refers to all inputs required to produce a product and fulfill a purchase. For example, a company that assembles computers would need to purchase components such as circuit boards. The circuit board company would need to purchase materials to produce them, including wire and silicon. All of these materials and components form part of the company's supply chain of materials needed to produce the end result of a working computer. Once the computer is built, a trucking company may take it to a wholesaler warehouse, and then it may be delivered to a retail store for sale or shipped directly to an end user. Every step - from sourcing of raw materials to final delivery to the customer - is considered part of the supply chain of the computer.

How Do Companies Integrate Supply Chains?

There are several different levels of supply chain integration. Generally, the first step in integration would be to select specific vendors to provide specific inputs, and develop an agreement for them to provide a set amount of inputs during the year at a set cost. This ensures the company has the materials it needs to produce its expected output of computers during the year. Our computer company might sign a contract with a large supplier of circuit boards, for example, that requires it to deliver a specific quantity at specific times during the year and sets a price that will be in effect during the contract.

A higher level would be to integrate the companies more closely. The circuit board provider might build a plant close to our assembly plant, and we might share production software so the circuit board company can see how many boards we'll need in the upcoming week and can build them as we need them to meet sales demand.

An even higher level is called vertical integration, which is when the supply chain of a company is actually owned by the company. For example, our computer company could purchase a circuit board company in order to ensure a dedicated supply of components.

The Advantages of Integration

Some of the primary advantages of supply chain integration are:

Inventory Management:
Close alignment with input providers means that a company can order materials to be delivered as needed, rather than purchasing large quantities that then need to be managed and stored.

Known Costs:
Since the company will use a specific supplier for a specific material, long-range contracts can be drawn up which set the price of the item. This fixed cost of input makes it easier for the company to set a selling price for its item that guarantees profitability for the company.

Guaranteed Customer:
A company in an integrated supply chain is producing its products to fill a need in the chain and will send them on to the next company in the chain once they are produced. This means the company will not have much finished goods inventory sitting in its warehouse, since it's building to fill open orders.

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