Definition of terms

Definition of terms

Forward integration and backward integration

Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.

• A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by integrating the production of cars and car parts as exemplified in the Ford River Rouge Complex.
• A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold.

Push and Pull

• A push–pull system in business describes the movement of a product or information between two subjects. On markets the consumers usually “pull” the goods or information they demand for their needs, while the suppliers “push” them toward the consumers. In logistics chains or supply chains the stages are operating normally both in push- and pull-manner. Push production is based on forecast demand and pull production is based on actual or consumed demand. The interface between these stages is called the push–pull boundary or decoupling point.

Producer-driven and buyer-driven

• Producer-driven value chains:

In producer-driven value chains, producers or manufacturers play the central roles in coordinating production networks including their backward and forward linkages. Representative producer-driven value chains include the capital- and technology-intensive industries such as automobiles, aircraft, semiconductors and heavy machinery.

• Buyer-driven value chains:

Buyer-driven value chains, on the other hand, are those in which the buyers (retailers, marketers and branded manufacturers) play the pivotal role in setting up decentralized production networks in a variety of exporting countries, typically in developing countries. The physical production of the goods is separated from the design and marketing functions, and is carried out by the no-name manufacturers behind the scene.

OEM and OBM

• An original equipment manufacturer (OEM) manufactures, assembles and delivers  products to another company to be retailed. An original brand manufacturer (OBM) adds an extrinsic value to and sells products as its own branded product, apart from manufacturing products. Due to instable production orders, some companies try to diect business market, establish its own brand (OBM).

Economies of scale and Economies of Scope

• Economies of scale are the cost advantages that enterprises obtain due to size, throughput, or scale of operation for a single product type. Reduction in cost per unit of output resulting from increased production, realized through operational efficiencies. A large manufacturing facility always have a lower variable cost of output than a smaller one, when all other factors are assumed to be equal. To enhance greater efficiency, a company can buy inputs in bulk to take advantage of volume discounts, employ the use of specialized labor and machinery, and better organize its resources by improving its techniques for production and distribution.
• Economies of scope improve product diversification efficiency, lowering average total cost of production associated with increasing the scale of production for two or more products. Because of sharing advertising costs and use of storage facilities, a company produce two or more products at a lower average cost than what it would cost two separate firms to produce the same goods. It is also more efficient to ship a range of products to any given location than to ship a single type of product to that location.

EDI, VMI, MTM, CPFR, and X-docking

• Electronic data interchange (EDI) is an electronic communication software or system to exchange information, files and documents, such as purchase orders, invoices and shipping notices. Using EDI, sharing of data becomes quicker and cost effective, and thus it increases productivity.

• Vendor-managed inventory (VMI) is a means of supply chain collaboration to optimize performance in which manufacturer is responsible for maintaining an agreed inventory level. The vendor creates the purchase orders based on the demand at the store or warehouse level and does the demand creation and fulfilment based on real-time front-line sales information. It reduces inventory and shortens replenishment cycles.

•  Made-to-measure (MTM) system provides significant differentiation to lock in the specialized retailer customers. To order a made-to-measure garment, the customer's measurements are first taken by a retailer. Then, a garment is constructed from a base pattern, which is altered to match the customer’s measurements. The products are well-fitted to customers but the waiting time of delivery is longer.

• Collaborative Planning, Forecasting and Replenishment (CPFR) a concept that aims to enhance supply chain integration by supporting and assisting joint practices. By sharing information between suppliers and retailers, it helps planning and satisfying customer demands. Also, continuously updating of inventory and upcoming requirements decreases merchandising, inventory, logistics, and transportation costs, and thus improves efficiency of process.