Abbott Labs and Vertical Integration

Abbott Labs and Vertical Integration

Vertical integration: Problems and solutions for Abbott Labs

Increased managerial costs

As a thoroughly vertically-integrated company, Abbott must bear additional costs regarding the managing of different aspects of its supply chain, from owning its processing plants to controlling its distribution channels. One problem with outsourcing, however, is the difficulty of quality control. The toy company Mattel recently suffered a public relations disaster when it was discovered that one of the firms it had outsourced its operations to in China had used lead in Mattel products designed for children (Mattel outsourcing success victim, 2007, UPI). Outsourcing must be strategic and the partnering firm must be carefully vetted. For a pharmaceutical company like Abbott, it is particularly important that all products are held to a high quality standard, for legal as well as economic reasons. Another option is merging with smaller firms on the supply chain, although this can result in additional burdens regarding production and maintenance costs.

The bull-whip effect

Small, lower-end variances in the supply chain can result in smaller players having a drastic effect upon the fortunes of a large company like Abbott. Communication is essential to avoid costly delays or deterioration of product quality. Many companies have instituted constant communication via the use of online technology, and Abbott, as a technologically forward-thinking company should consider such an option to reduce the challenges of demand backlog and delay times (Bullwhip effect, 2011, Net MBA). Ideally, a company should operate seamlessly up and down its supply chain and as smoothly as if every hub of the chain were a fully-supervised on-site facility with the information possessed by the parent company. In the new, technologically wired global environment, this is more possible than ever before.

Technological obsolescence

Investments must always be made based upon cost-benefit analysis. One of the advantages of analyzing company metrics is to determine if a short-term investment will have a long-term payoff. Abbott must periodically do a 'technology audit' to ensure that the costs of maintaining old systems are not a greater financial drain than upgrading. It must apply the same rigor it does to evaluating its supply chain as it does to the quality of its pharmaceutical products.

Strategic inflexibility

As a company with a worldwide outreach, Abbott would benefit from leasing areas to serve as distribution hubs. This would enable it to retain close contact with both outsourced and non-outsourced segments of the supply chain, yet allow for greater flexibility and agility regarding the market situation and new opportunities. Of course, the costs of leasing must be contrasted on a cost-benefit basis with the costs of maintaining a unity.

Increased mobility and exit barriers

As demand grows more volatile, the costs of 'exiting' a particular market or area have increased. This can be difficult if a product is shown to be ineffective over time or demand decreases due to the availabilities of cheaper competitors or generics, or simply because of demographic shifts. Once again leased distribution centers will provide greater flexibility for the company to make quick adjustments.

Tight coupling to poor performing business units

As Abbott seeks to outsource strategic parts of its operations, it must also look to divest itself of less profitable units. This will free up funds for new opportunities in the future as well as result in short-term cost savings. Once again, leasing will result in greater freedom in regions with great market volatility.