Firstly, I would like to credit the idea of this post to a friend of mine who brought this subject up after a meeting earlier on today. He know who he is!
Secondly, although “vertical integration” sounds like a boring subject, please stick with this one, as it could be an idea that could change the whole structure of the window and door market in the coming year.
What is vertical integration in business?
According to Wikipedia, this is the definition of vertical integration:
In microeconomics and management, vertical integration is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.
So how would this translate to our industry? Well, a systems company would own a fabricator, and a fabricator would own an installer. Imagine this then on a larger scale. A systems company owning a number of fabricators, and a number of fabricators owning a number of installers. It’s a very neat and tidy way of cleaning up the whole supply chain and organising it nicely.
The market right now is “challenging” as some people have described it, which is a polite way of saying it’s a bit rubbish. It’s just not as busy as many thought it would be. So, that leaves companies who are still looking to grow and expand with a bit of a dilemma. Do fabricators go out and find new installers? That would be a difficult task in a market that is slowing down and when there is still too many companies in ratio to current demand. Option two is vertical integration.
Tapping into the supply chain
The whole point of vertical integration is to tie things up between one part of the supply chain with the other. In our industry, this would be a fabricator buying outright, or at least part of, a number of it’s own installer customers. What’s the advantage of this for the fabricator? They now get direct access to the installations side of the market without having to create an installation company of their own. They get to tie in the installers they buy to guarantee they only buy their product from here on in, which in theory could grow their own sales if they bought the right installers and the right number of them.
From the perspective of the installer, they get a cash boost, to invest where they see fit. They would get better marketing support, better customer service, better communication etc as the fabricator now has a vested interest in making sure their purchased installers are successful. The only likely restriction would be that they have to buy solely from their fabricator and no one else, something which some may be happy to do, some may not.
It’s an interesting idea, and one that works further up the chain. There is nothing to stop a systems company buying a series of fabricators and entering that facet of the market, without setting up a dedicated fabrication business. They can ensure that more of their product of bought from those fabricators by making them sign agreement not to fabricate any other product, helping growth.
The whole point of vertical integration is to ensure a more reliable, healthier profit margin all the way from the bottom of the supply chain to the top. The profits made by the installer in a vertically integrated chain would flow directly up to the fabricator, and from the fabricator up to the systems company. No money has been diverted to other fabricators at installer level, and from the fabricator to the systems company.
Difficult to grow
When I look at the market now, I still believe that there are far too many companies to serve the demand from the general public right now. Too many installers and fabricators. It’s possibly why so many are reporting average performing years for 2015.
This creates a bit of a barrier for growth. Fabricators naturally want to look for more installers to add to their ranks. But if there are too many, and demand is stagnant, these new customers aren’t necessarily going to bring on the new business required to help the fabricator grow. So where do they turn next?
The answer is right there, in front of them. Quite often your existing installer customer base is your best chance at growing yourself. Rather than go out and find new installation business, which can be expensive at times, why not look at your existing customers and see how you can work together to grow both the installer and the fabricator? Or, why not go one step further and expand your business into another areas by integrating the various parts of the supply chain? Long term it’s a great way to ensure more of the revenues come by your way as the fabricator.
From what I was told during our chats on Tuesday, vertical integration is already happening in small pockets of the industry. And according to this friend of mine, in the next five years there’s going to be quite a lot of it going on. For him, it’s going to change the whole structure of the window and door industry in this country. And I agree with him.
We have a very messy supply chain in the UK fenestration market. There are so many levels involved, and it breeds problems and complications at every stage. If there is a method that tidies the supply chain up, by binding the various levels together, ensuring a more organised structure with secure and growing profit margins, then I don’t think it’s a bad thing at all.
Again, a big thanks to this mate of mine for the subject of this post. If anyone has any comments on this post, please leave them via the comments section below.