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Operations Management: Sustainability and Supply Chain Management (12thed.). Heizer, Render, & Munson.(2017).Based on this case study, the relationship between Ferrero and Oltan is supplier andmanufacturer. Thus backward integration will be more considerable. To be effective, verticalintegration has to have sufficient cost savings to make up the investment for integration and itsoperations. In my opinion, there are three key advantages of vertical integration which arematerial cost reduction, supply chain cost reduction and quality control. First of all, as mentionedin the Ferrero Group Study (2016), cost fluctuation of raw material makes the market unstable.As a consumer, I would judge products and brands image with how they can provide consistentand stable service and product. When we talk about products only, the increase or decrease ofcosts is definitely from the raw materials cost. Therefore, I think this material cost reduction isthe major advantage from vertical integration. Secondly, there will be cost reduction from supplychain restructuring. Supply chain involved in every industry and business. When we usebackward integration strategy part of vertical integration, we can eliminate or reduce supplychain cost. Because the margins that supplier has, will be removed from backward integration.
FERRERO GROUP CASE STUDY6Lastly, the quality control is advantage from backward integration. Especially food industry, ifthe company owns farm (supplier) they can get the quality they want. They do not need todepend on their suppliers and able to control the quality appropriately.On the other hand, there are three disadvantages from vertical integration. First, there is possibility of inefficient production costs. I have seen some cases of this. For example, if a serialized component maker is rather inefficient compared to other competitors, the production cost may increase. Automaker GM is more vertically integrated than Chrysler and I have seen this disadvantage from this example. Second, there is a risk of loss of investment opportunity. Vertical integration can increase a company's capital investment and possibly lose another investment opportunity. Lastly, I think there is possibility of increase of competition with other companies if the company integrated vertically. The reason for this is that competition will be worsening as the company's business scope expansion.