Bacward integration is another cost cutting tool used by big corporates to cut cost.
Pepsi co in India is in food processing. As a step to cut cost, they have started procuring agriculture produce eliminating vendors.
MDH spices needs millions of spices packs.They have set up offset printing to cut cost of final product
Backward integration is to expand business activities into processes which feed your demands for inputs for producing final products.
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Quoting from [sixer]:
At diiferent times, I have posted in replies to cut cost of operations, and I recieved responce that if cost is cut, the quality will also be cut.
Bacward integration is another cost cutting tool used by big corporates to cut cost.
Pepsi co in India is in food processing. As a step to cut cost, they have started procuring agriculture produce eliminating vendors.
MDH spices needs millions of spices packs.They have set up offset printing to cut cost of final product
Backward integration is to expand business activities into processes which feed your demands for inputs for producing final products.
It has to depend on volume and cost effectiveness. Let's take the MDH spices backward integration as our case study.
Setting up your own printing press involves initial capital investments, manpower and inventory management of materials and production schedule.
Printing press works on economy of scale, with more printing and more reliable source of supply. If the job is outsourced, there is wider choice and alternatives to fall on, and the price could be lowered further if there are competitions among the suppliers. For every printing job, there is a requirement to hold stock of the material, such as paper and pigments for the ink. There is also a need for packaging design specialist just to do the job for MDH and no one else.
After calculating all these costs, labour, materials and depreciation of machinery, and space rental including warehouse for material, and maintenance cost and comparing it with the price of the packaging material provided by vendors. If there is savings, and long term benefits, then go for it.
Perhaps the rising costs are the material and transportation. Paper price has increased 16% to 20%, and fuel cost increases spur the rise in transportation.
Steeet
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Yes, It is in line of company objective to cut cost.
Wish you a happy 2007
Sixer
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Volumes play an important role in decision to go for backward integration.
Recently, FedEx has taken over (Bought)their sole Franchisee in India, Prakash Airfreight.Another way of backward integration.
Now to MDH.
As I posted, MDH require Millions of Packs for spices.
Paper generally p through atleast two hands before reaching the press. Their profits added to paper cost. Then, printer also have to add profit on investment on paper and profit on printing cost.
All costs include transport, wages, warehousing etc expenditures.
They buy paper direct from producers.Save on taxations @4%
Hence, by backward integration, by rough estimates, savings on Tax and dealer margins,they are likely to save nearly $ 25000 in one year, recovering the entire cost of setting up the printing facility in first year itself.
It is all about volumes, actually.
Wish you a happy 2007
Sixer
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Many US Beer makers used to only bottle or can their beer but due to rising costs they have purchased companies producing the bottles and cans that use. This is true for many brand names that utilize and buy certain commodities. In most cases it is cost effective as they can more redily control the costs instead of being at the mercy of the supplier.
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When you look around, many companies are going in for backward integration .Thankyou for sharing your opinion.
Wish You A Happy 2007
Sixer
Vishwanath Agencies
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Sixer
Vishwanath Agencies
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It is another fine example what backward integration can do if volumes permit.Thanks for your input.
Sixer
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*"MDH require Millions of Packs for spices."*
And to take the equation to it's furthest point Sixer. To make the integration even better they would have looked into whether or not it actually beomes more cost effective to see if owning a paper mill would work......... And then would it be more cost effective to own the tree plantation as well?
They would also look at the rest of the packaging to see where they can go in that direction. (Assume they use a tin to put the product in. should they buy a tin making factory.. right down to the mine)
Another advantage to this style of ownership which can also be of benefit is the spreading of the company into non-traditional areas of business....... It can help a company whether downturns in a single sector and thus keep profits at reasonable levels. The is, of course, some danger in this methodology as has been seen in a number of large companies.
(good example would be Fosters)