Why is Horizontal Integration different in the world of Logistics
So if you went to Business School and read those strategy books, your definition of horizontal integration is essentially a strategy where companies accquire businesses operating at the same level of the value chain in a similar or different industry.
However, from a logistics point of view, horizontal integration is something different. Logistics horizontal integration is concerned with using the full potential of an organization to maximize the total cost algorithm. It means that Logistics capabilities of an organization integrates seamlessly with all other planning capabilities within an organization.
The sad truth is- it rarely exists
Horizontal integration is currently not widespread even though there are substantial opportunities that exist for companies, in terms of operating efficiencies and cost reductions. The primary reason that horizontal integration currently does not exist is because till recently, the technology cost of creating an end to end platform view of your Supply Chain was very high. Interoperability/Integration of different systems was extremely challenging, open source tools were not ubiquitious and the sheer computing power required to manage an end to end connected enterprise was not within the reach of most companies.
Those bottlenecks do not exist now….but the imaginary boundaries and constraints in our minds do exist.
What benefits will Horizontal Integration drive ?
We keep on talking about developing end to end connected Supply Chains as one of the aspects of our viewpoint of Smart Supply Chains in the future. Then ask the question- why eaxctly do we want that end to end connectivity ?
At a granular level, the reasons behind seeking this end to end connectivity in your Supply Chain can lead to a very long list but at a high level, you can summarize it into the following aspects: Singular view into a flow of assets, information and ???
And then the long list gets derived from this aspect. You can monitor the flow, apply controls to regulate the flow, optimize the flow, divert the flow (in disruptive events)….the list is long ! So what should an ideal integration look like ? The illustartion below represents what I mean by the Horizontal integration of Logistics.
Driving the kind of horizontal integration depicted above will improve logistics operations for a firm significantly. If you think about this from an end to end perspective, this type of integration allows the organization to exploit the full potential- in order to optimize the total cost algorithm. Total cost minimization with improved service happens with the multi-way integration above.
We are still years away
There are many bottlenecks on the path to attaining the horizontal integration described above. Some of the key ones are:
- “Perception” of technology and system constraints
As mentioned above, till recently, the technology cost of creating an end to end platform view of your Supply Chain was very high. Interoperability/Integration of different systems was extremely challenging, open source tools were not ubiquitious and the sheer computing power required to manage an end to end connected enterprise was not within the reach of most companies. Those are not constraints anymore now so companies should plan assuming that they will have the tech infrastructure and capabilities available at reasonable cost to pursue their integration ambitions.
2. Poorly designed incentives and compensation programs
Ecah of the boxes represented in the diagram above operates in its own world. There is no oncentive for people to make changes based on horizontal integration. Many times, metrics in Supply Chains are designed such that people are financially motivated to do the opposite of what is prident for the organization as a whole. An end to end process design and re-engineering needs to happen much before any systems and technology aspects come into play.
Views my own.