Vertical integration means greater independence for the company: greater control over the costs and qualities of its raw materials, better compliance with delivery times, greater responsiveness…
For an SME in the textile sector, this business model is not only a structural change in the organization, it also represents the opportunity to manage the quality of its products, to control costs and to decide on innovation. Of course, it requires an integrated technological ecosystem and responsibility for the environment.
What is the vertical integration of a company?
Vertical integration is a business strategy in which a company assumes direct control of multiple links in the value chain, managing activities that are normally carried out by suppliers or distributors.
This strategy can be implemented forward or backward:
- Backward vertical integration. In this case, the company expands its control to the upstream activities of the production of the good it markets. For example, when a fashion brand acquires or develops cotton farms or textile mills, so that it controls the first stage of the supply chain and does not depend on third parties.
- Vertical forward integration. This strategy involves the company taking control of the downstream stages of the value chain, those that are closest to the customer, such as distribution and marketing itself. For example, when a fashion brand opens its e-commerce store or its physical store, or the creation of its own logistics centers to control shipments.
Why is vertical integration gaining ground in the fashion industry?
Beyond being a trend, vertical integration is a response by companies to the demands of today’s market: speed, cost optimization and brand differentiation. Let’s look at these factors and see how the rise of vertical integration came about.
A dynamic market that demands speed
The concept of temporality, whereby the classic collections were launched in spring/summer or autumn/winter, is no longer sufficient. Connectivity and digital platforms have accelerated the pace of the market, demanding short production cycles, fast deliveries… Demanding more agile, more dynamic, faster business models, such as fast fashion and ultra-fast fashion.
How does vertical integration help fast and ultra-fast fashion? For example:
- In reducing time-to-market. If the company controls critical processes, such as sourcing, manufacturing and distribution, it can optimize both the development time of a new garment and the time to launch it. In this way, the company can react in real time to trends.
In addition, companies that internalize the production of raw materials have greater control over their production processes, which gives them a greater capacity to adapt to demand. This allows them to mitigate risks associated with overproduction (inventories with no outlets) or stock-outs (stock ruptures).
Cost optimization and profit margin maximization
The cost associated with the production stage in the textile sector is intrinsically linked to factors such as raw material procurement, labor costs, transportation logistics and the involvement of intermediaries. The vertical integration strategy is effective in optimizing each of these elements and improving operational efficiency.
- For example, by adopting backward vertical integration, a company can eliminate intermediary players in the supply chain, facilitating the direct procurement of essential raw materials. In addition, this strategy can be extended to the internal development of key processes, such as the design of its own garments, allowing greater autonomy and control over the quality of its good/service and profit margins.
Brand differentiation
In the textile and fashion sector, consumer perception is key. Therefore, for companies, guaranteeing the quality of garments is a determining factor in increasing their competitive capacity.
In the face of this, vertical integration offers great advantages to ensure superior standards. For example:
- Fashion companies, with their own factories, can develop new models or materials in reduced times, generating great competitive advantages in terms of sustainability and design.
- Backward vertical integration allows companies to supervise every stage in the manufacturing phase, from the selection of fabrics and yarns to the design and creation of models. This way, they guarantee their quality levels without relying on third parties.
What do companies need to achieve vertical integration?
On the other hand, vertical integration also implies for companies to manage more complex processes, since it involves controlling various stages of production, sales and distribution. In addition, companies are exposed to greater risks because they concentrate a greater number of processes that depend only on their internal resources.
Against this backdrop, in order to achieve successful vertical integration in the textile and fashion sector, it is essential to invest in two essential pillars: technological integration and a focus on local production.
Technology integration
Technology is the backbone that enables the coordination and control of an integrated supply chain. Of course, it must be to create an ecosystem that also integrates technological tools, to enable the synchronization of information, to ensure traceability and to be able to offer a quick response in highly competitive markets.
What critical elements are part of this technology ecosystem? Mainly:
- An advanced ERP-type management system, such as SAP Business for SMEs, to centralize information and facilitate decision-making in real time.
- Automation of production and intralogistics, through intelligent and eco-efficient machinery that increases productivity, reduces energy consumption and cuts waste. They must be able to integrate with management systems and send operational data.
- For example, such as automated packaging solutions: the automatic case erector or the case sealer. In addition to speed, they have low energy consumption and operate with both new and used boxes.
- The development of e-commerce platforms integrated to information systems, in case of a vertical integration forward. This is what strengthens the connection and direct communication to the consumer.
- The implementation of traceability systems that guarantee transparency in the origin of materials, production processes and product distribution and delivery operations. Some of the technologies and tools are the following:
- RFID tags that are integrated into garments or packaging.
- The clothes hanger counter.
- Blockchain technology, to ensure maximum transparency.
Focus on local production
This trend is not just about reducing logistics time and costs. It responds more to the growing consumer demand for sustainability in the fast and ultra-fast fashion sector. So vertical integration should also be characterized by:
- The establishment of local operations to support small economies. These may be agricultural, manufacturing or logistics operations.
- Collaboration with local workshops and suppliers. This boosts the economic development of the region and reduces dependence on production in other countries.
- The use of regional materials, which guarantee a more sustainable production and lower transportation costs.
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