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Moving from Vertical Integration to Virtual Integration
Saturday, February 03, 2007

I like to make up terms of different things that don't exist. For example, Virtual Integration only exist in my head and now this entry.

Before I start making stuff up, let me quickly and informally define vertical integration. A vertical integrated company is the one that likes or has to do everything under the sun, from manufacturing the screws that go into whatever widget the company is creating to managing the call centers that handle customer support. Vertical integration is the antithesis of outsourcing. There aren't that many completely vertical integrated companies, actually, but the ones that are do so because of control and costs (I'll write about this in a few days, so come back).

Now, what is virtual integration?

The concept shouldn't be alien to anyone. In a nutshell, I think of it as the next step of business-to-business (B2B) buyer-supplier relationship. I think of it as the next logical progression of supply chain integration.

There is a subtle difference, though, between what I consider virtual integration and supply chain integration. Mainly the what and how the integration is being accomplished.

The typical form of collaborative integration (supply chain integration) is that of sharing all information about your business with suppliers. Note that all doesn't mean all corporate intelligence. What I mean is the the sharing of information that makes it easier for your suppliers to sell you the things you need to carry on your business. For example, sharing your forecast sales with your suppliers allows them to make exactly what you need at the best price possible. Think of Just In Time (JIT) or Just In Sequence (JIS) manufacturing: you get what you need when you really needed.

Many large corporation make supply chain integration part of their corporate strategies. Toyota, for example, creates buyer-supplier relationship with part manufacturers that allows it to out-compete the large 3 car makers in North America. Aside from their streamlined processes, JIT is what makes them different from other car manufacturers.

How is supply chain integration accomplished? If you are interested in how integration between buyers and sellers takes place, read up on Rosetta Net. The Rosetta Network "is a non-profit organization dedicated to the collaborative development and rapid deployment of open, e-business process standards that align processes within global trading networks. RosettaNet standards and services provide a common language for e-business transactions and the foundation for integrating critical processes among partners within the global supply chain."

It would seem that with the aid of protocols and the internet we would consider supply chain integration to be a virtual integration. However, I think of virtual integration at a higher level of integration. In other words, virtual integration (as I envision it) is the direct integration with your partners at design time and not just at manufacturing or buying time.

Lets fast forward to my envisioned future where vendors will likely be able to design and test products in a virtual-reality world. Imagine suppliers directly connected to Car Company X building virtual cars with virtually supplied parts to design centers across the world. (This is not too far fetch: Ferrari actually designs and tests the interior of their cars to assure a custom fit with the driver.)

The advent of faster networking technology, large storage capacities, and insanely faster computers will make virtual integration possible. Suppliers will be able to upload their manufacturing capabilities to a Toyota design center, for example, where engineers will be able to create and test new cars without worries of part limitations.

The manufacturing cycle will be greatly decreased as there won't be the need to check with the engine maker if a certain part can be rotated or not. The Toyota engineer will do so virtually because all potential capability of the supplier will be part of the entire system. Once a virtual product has been designed and virtually tested, all part manufactures will already know what the specifications of the new car will be and production of the new components will already be under way, with very little surprises.

In this Toyota example, it's a very obvious and simple concept: a universal CAD program. Sending CAD files over email is probably nothing new, however, the innovation of virtual-integration is different in the fact that the actual capabilities of each partner will be available in real time.

It will take maybe a decade or so to get to a real implementation of my vision (if not prediction), and it will take groups like the Rosetta Network to develop communication protocols and rules to achieve such massive data exchange system, however, one thing is for certain, the internet (in whatever version we will be) and what we will call e-commerce then will be the heart and brains of such virtual integrated companies.

1:22 PM | 0 comment(s) |


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