How much sense does it make for a business to expand horizontally in the supply chain?

August 5, 2008 7:04 PM

How much sense does it make for a business to expand horizontally in the supply chain?

To the business experts,

My family owns a mid-size business that sells construction materials and misc hardware in various islands in the Pacific Ocean. A significant percentage of their suppliers are from the U.S. and brokers in the U.S. handle the sourcing and shipping of the materials. They are looking into having me start a buying office in the U.S. so they can own the "broker" stage of the supply chain also.

However, I am not too familiar with the import/export business and protocol, and have doubts as to whether this will be feasible. What I am unsure about is whether suppliers will do business directly with a small account like myself. The broker that we use sources multiple clients and definitely benefits from the economy of scale and have leverage in negotiating with suppliers. Will my family's business actually benefits financially from expanding the horizontally in the supply chain or will we not increase our profit margin by that much due to the smaller size of our orders compared to our broker?

I understand the question is extremely general and I'm not providing much details but I'm hoping to get a general idea of the relationship between size and gross margin in the supply chain.

If possible, I'd definitely want to connect with someone knowledgeable in this matter to discuss some more once I have more information.

Thanks.

posted by willy_dilly to work & money (4 comments total)

Just a minor quibble. What you are describing is know as vertical expansion or vertical integration. Horizontal expansion would be ways to increase your revenue by expanding the breadth of your product line. Vertical integration means taking more control of your supply chain and eliminating outsourcing or external suppliers. This distinction might help you when googling for answers.
posted by JackFlash at 9:04 PM on August 5, 2008

More directly to your question. Nobody is going to be able to tell you if this strategy will save you money. You are just going to have to do the inquiries and do the math and see if it makes sense. Don't worry about your lack of experience. People start businesses all the time and figure it out as they go.

All suppliers are interested in selling more stuff. If you give them the opportunity to sell more and both of you make money, they'll be interested in talking to you. You may find some that aren't interested in dealing with small accounts, but you will find others that are interested. It will take some work on your part. Along the way you will also find people willing to give you information about the ins and outs of import/export and shipping. After all, if they help you, they sell more stuff. Just keep asking questions. It may take you a month or two of talking to lots of people but you will gradually figure it out.
posted by JackFlash at 9:29 PM on August 5, 2008

Turn around and look to China. China is right in the middle of a huge building boom, so you shouldn't have any trouble sourcing construction materials at even lower cost there.

That having been said, start out by trying to negotiate better deals with your existing suppliers, as well as new ones. You might be surprised what happens when you start to play hardball.

While you are investigating new suppliers, it will become more and more clear whether a vertical expansion really makes business sense in your situation.

Also: what everyone else said.
posted by b1tr0t at 10:04 PM on August 5, 2008

I am a Supply Chain Management consultant, however, IAN *your* SCMC.

You've gotten some good advice already. I'll add this:

Most companies, except for the exceedingly large ones who really drill into how best to integrate SCM into their overall operations, generally run into trouble when they start to try and a flex their level of "ownership" across the Supply Chain. Its because in order to make gains in the SC arena, they necessarily have to shift some of their focus off of their core competencies. Most small-to-medium (and even many large) businesses I think would be best advised to focus on what they do best, do it better than anyone else, faster, and at lower internal costs. This is where you can see your biggest margin gains.

That said, if you are already maxing out on your core competencies, and you have additional bandwidth, by all means start to investigate a shift. Yes, the bigs will always have advantages of scale over you, but what is it that you can offer from a more personal, smaller position, that the bigs don't have? Find out what that is and work it.

Remember, "owning" a Supply Chain function (brokering, et. al.) can be a good thing, or a bad thing. Sometimes you want other people to own the other functions, sometimes its better that you own them. I realize that kind of restates your original question rather than answering it, but without a detailed market analysis / business case, nobody's really going to be able to answer your question for your specific line of work.
posted by allkindsoftime at 2:38 AM on August 6, 2008 [1 favorite has favorites]