When engineers talk about horizontal and vertical integration, they are talking about implementation design choices, i.e. whether to implement a single system based on particular functionality that integrates external systems (vertical) or whether to invest in an Enterprise Service Bus that facilitates broader communications (horizontal). But there is value at looking at the problem of integration through the business lens.
In the business world, Vertical Integration refers to bringing in-house, or acquiring a controlling interest in, different parts of a supply chain to help secure resources and service and enable optimisation and saving across the supply chain. Examples are Ford in the early 20th century (https://www.economist.com/news/2009/03/27/moving-on-up)
"By the 1920s his company (Ford) ran coal and iron ore mines, timberlands, rubber plantations, a railroad, freighters, sawmills, blast furnaces, a glassworks, and more. Capping it all was a giant factory at River Rouge, Michigan (pictured), which built the parts and assembled the cars."
and Tesla today (https://evannex.com/blogs/news/book-excerpt-tesla-s-vertical-integration-is-a-radical-change-in-strategy)
"Some have estimated that, of the over 5,000 components in a Tesla vehicle, around 80% are made in-house."
As different parts of the supply chain communicate better and refine their responsibilities to cater to the company's unique value proposition a company not only reduces costs and streamlines production but, through cross-pollinate of ideas and increased collaboration, can also create new opportunities and unlock value.
In Tesla's case a fresh set of eyes on the problem of building cars has brought issues but also advantages (https://www.bloomberg.com/news/features/2018-10-17/tearing-apart-teslas-to-find-elon-musk-s-best-and-worst-decisions)
"The software and electronics are also better. Munro found that Tesla reduced the amount of wiring snaking through the car by concentrating a lot of the electronics in small circuit boards. That’s knowledge from Silicon Valley that the carmakers don’t have."
Vertical IT Integration Through Business Lens
Assuming the supply chain is more than just moving goods to the customer but also includes:
- Product Development
- Customer Service
Focusing on how products are developed, created, sold, delivered and supported and looking at the flow of information, materials and resources, at each stage of the supply chain we need to identify:
- internal systems currently involved
- external systems currently involved
- internal systems that could be involved
- external systems that could be involved
You will see some systems like CMS, ERP, WMS and Finance are either already involved in multiple steps or could be. You will also find where ever you are dealing with an external party like suppliers, transport companies, media houses etc they will usually have some form of system to system communications (think email or FTP file drops) or APIs available.
Where to Start
Theory of Constraints, which we will discuss more in future posts, dictates that there will be only one constraint in the system at any given point in time. Along the supply chain there is one point that is preventing movement from the left (inputs) to the right (output) more than any other, and when you alleviate that constraint, you will see an increase in production. Once you find that constraint it should be fairly easy to explain in concrete terms the dollar value benefit of alleviating that constraint and this should be doable in iterative steps, i.e. start with a simple and cheap solution and then build on it until that part of the supply chain is no longer the constraint. Once a constraint has been resolved, then another part of the supply chain will surface as the new constraint.
Integrations don't need to be complex solutions with high upfront cost in time and money. One can start with download and upload of spreadsheets with some smart macros to optimise daily activities and then work towards more mature solutions as, or if, the value becomes more and more apparent.
Understand how the business works and how information, materials and resources move internally and externally. Then list out all the IT systems that are, or could be, involved at each stage. Focusing on delivering the customer an incredible experience and enabling the business to cut cost and unlock value, see what incremental improvements can be made re system integrations, which can be discussed in concrete terms of money/effort saved, value unlocked and improvements for the customer.