[pullquote]Vertical integration — making key raw materials and producing a finished product at a single site — can yield important efficiencies. Its application on a large scale dates back more than a century. For instance, Ford Motor Company started production at its River Rouge complex in Dearborn, Mich., in 1918. That massive site included its own steel mill, glass works and power plant. In our industry, the integrated refinery/petrochemical complex probably best typifies vertical integration.
However, in recent decades, the allure of vertical integration certainly has waned in many manufacturing sectors both for economic and strategic reasons.
For instance, large automakers now tend to favor regional factories — e.g., like the ones that Japanese, German and Korean car companies operate in the United States — rather than serving all markets from a single, massive plant. This can offer significant benefits in cutting transportation costs and avoiding tariff and other trade issues in key markets. In addition, such factories allow the companies to more easily tailor products to the individual regions and to respond more quickly to local trends.
Foreign chemical manufacturers have flocked to America, too. Indeed, the United States has garnered a massive amount of investment from such companies. This reflects not only their interest in being better placed to benefit from the strong rebound expected for the American economy, as covered in last month’s cover story “Brightening Outlook Buoys U.S. Chemical Industry,” but also feedstock advantages that American production offers.
A strategic shift also is occurring. Many companies in the chemical industry and other manufacturing sectors have decided to concentrate on their “core competencies,” aiming to excel in the most important areas rather than be pretty good at a lot of things.
This shows up in many ways.
For instance, not that long ago, major chemical manufacturers strove to handle much of their engineering internally. They prided themselves on their extensive corporate engineering staffs filled with industry-leading specialists on a broad range of technologies.
Today, many operating companies believe that devoting considerable resources to engineering just doesn’t make sense because they are manufacturers first and foremost. So, they have pared their central engineering staffs substantially or dispersed specialists to individual plant sites.
Likewise, the idea that a chemical company must make everything it sells doesn’t seem as compelling to many corporate executives nowadays. Sure, some chemical firms long have relied on tollers for specific products. However, I sense that outsourcing of manufacturing is gaining increasing interest. Various factors likely contribute to this, most prominently, the quest to minimize capital expenditure, the lack of suitable in-house equipment and specialists, and the desire for faster product commercialization or response to market changes than possible internally. This issue’s cover story “Make Sound Moves With Tolling,” provides some valuable tips for properly outsourcing production, including how to select the right contract manufacturer and how to forge an effective working relationship.
The famous philosopher Yogi Berra was right: “The future ain’t what it used to be.”
