Vertical retailers

The enormous success of vertical retailers like H M, Zara, Gap and Next in the apparel industry in the last 10 years has forced manufacturers of brand labels like Esprit and Levi, and department stores like El Corte Ingles and Marks Spencer, to speed up their supply chains. Partly, this has been achieved by integrating their processes and systems upstream (towards their suppliers) and downstream (towards their end-customers) in the supply chain. 

Brand label manufacturers traditionally do not own their retail stores, and department stores do not have their own factories. This easily leads to competitive disadvantage in comparison with the vertical retailers, who have their own retail stores and have tight control over their manufacturers. To survive in today s marketplace against the vertical retailers, brand labels and department stores need to integrate their processes and systems from point of sale back into the factory. Elow can this be done ... 

Companies like Esprit have initiated strategies to become vertical retailers themselves. Elements of this strategy are to focus on core competencies and to offload all non-core activities to specialists who can perform such activities better and at a lower price. Another element of the strategy is to increase the number of collections from 4 to between 6 and 12 per year. This enables them to be closer to the market and thus to forecast and fulfil product demand more accurately. Of course, closeness to market increases the pressure on faster, timely product development and product delivery. The product life cycles of the individual collections are shorter, which leads to enhanced requirements for responsiveness on all supply chain partners. There can be no buffers, and deliveries have to be on time and in full. As a result of this, each partner in the chain has increased needs... 

In a supply network, no firm is an island that stands on its own. Nor does it compete on its own. A focal firm depends on its network partners for components to assemble, for products to sell, for the movement of goods, and so on. While Part Two focused on the central logistics task of achieving responsiveness to customer demand, most firms cannot achieve this without the support of their network partners. Complete vertical integration of an industry is unusual today - although vertical retailers have developed a similar strategy, as we saw in Case study 4.4. Functional specialisation of suppliers on those parts of the value proposition in which they excel, coupled with integration into the supply network, is more common. 

AH motor fuel in the United States is manufactured by private companies. Many of these are vertically integrated. That is, the same company finds the cmde oil or buys it from a producing government, refines it into finished products, and then sells to independent retailers who specialize in that company s blended products or sells at company operated service stations. There are also a significant number of companies that participate in only some aspects of the business cycle such as refining or marketing. 

The electricity mdustiy is m the midst of a transition from a vertically integrated and regulated monopoly to an entity in a competitive market where retail customers choose the suppliers of their electricity. The change started in 1978, when the Public Utility Regulatoiy Act (PURPA) made it possible for nonutility power generators to enter the wholesale market. 

In these countries, domestic bills are not affected despite an increase in wholesale price levels, and the vertically integrated companies cross-subsidize their retail costs with the profits from the free allocation. In other countries, dominant power generators might anticipate government intervention and thus refrain from passing on C02 opportunity costs to wholesale price levels. 

Different options are possible for investors and producers to securitize any generation investment in electricity markets by transferring part of the market risk to other parties, such as vertical integration, long-term contracts, or the combination of horizontal integration and vertical arrangement in a consortium. Such arrangements can help to shift the market risks onto players other than the producers, in particular retailers and consumers ... 

Once upon a time a few Hollywood studios owned everything related to the movies, from scripts to cameras to (essentially) actors to the theaters their films were shown in. A few studio moguls had near-complete control over what movies most of the world saw through this process of vertical integration, which refers to ownership of every aspect (production, distribution, etc.) of a product from conception to retail sale. 

Cl is especially concerned about some global retail chains with a high level of vertical integration. Competition policies need to be strengthened. The establishment of large, low-price stores with loss leader policies has been foimd to give consumers fewer products in each store, which is a wonying trend. 

Amazon.com is a weU-known intermediary for publishing firms. As Amazon.com expands its product offerings, it has become an intermediary or a distributor/retailer for other products and services as well. A vertical portal such as Amazon.com or a corporate portal such as Dell is well positioned to expand horizontally and become a cybermediary dealing with their own as well as others businesses. 

Partners in different echelons, whose capabilities do not overlap, represent a vertical combination. An example is Wal-Mart, a retailer, providing point-of-sale information to McKesson, a pharmaceutical distributor. McKesson, an upstream partner in the supply chain, is then able... 

Issues about coordination of business activities have been studied extensively in recent years. In a typical distribution channel, coordination can be characterized as Vertical or Horizontal. Vertical coordination focuses on the issues of why and how the different channel members (for example, supplier and retailer) should consolidate their operations to achieve better system performance. It is also known as Supply Chain Coordination. For a thorough review of vertical channel coordination, please refer to Cachon [27] and several chapters in Tayur et al. [147]. 

Superscripts I, T and D will denote vertically integrated, vertically disintegrated (traditional), and drop-shipping supply chains, correspondingly. Further, we will consider three drop-shipping models. In Model DW the wholesaler has channel power, in Model DR the retailer has channel power, and in Model DN the players have equal power. We also assume the following quite general form of the demand distribution ... 

From part a) of Proposition 6, we see that vertical disintegration leads to underspending on customer acquisition by the retailer, and in drop-shipping models the retailer imderspends more than in the traditional model due to the misalignment of marketing and operations functions. It is interesting to note that... 

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