A01 chaf6542 06 se fm indd

  Virtual  organisation 

  An  organisation  which 

uses information and 

communications 

technology to allow 

it to operate without 

clearly defined physical 

boundaries between 

different  functions.   

  Virtualisation 

  The process of a 

company developing 

more of the 

characteristics of the 

virtual  organisation.   

  Options for restructuring the supply chain 

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Chapter 6  Supply chain management

Supply chain management options can be viewed as a continuum between internal con‑

trol (‘

vertical integration

’) and external control through outsourcing (‘

virtual integration

’). 

The intermediate situation is sometimes referred to as ‘vertical disintegration’ or ‘supply 

chain disaggregation’. This continuum is illustrated in Figure 6.10.

There was a general trend during the second half of the twentieth century from vertical 

integration through vertical disintegration to virtual integration. In the car manufacturing 

industry traditionally car plants would be located near to a steelworks so that the input would 

be raw materials, with finished cars as the output. Other components of the car would also 

be manufactured by the company and other value chain activities such as marketing would 

largely be performed in‑house. There has been a gradual move to sourcing more and more 

components such as lights, upholstery and trim and even engines to third parties. Marketing 

activities are now largely outsourced to marketing agencies. Another example is the purchase 

by pharmaceutical companies of pharmacy benefit managers (companies that manage drug 

distribution with private and company health schemes). By acquiring these companies which 

are part of a pharmaceutical company’s downstream supply chain the aim is to ‘get closer to 

the customer’ while at the same time favourably controlling the distribution of the company’s 

own drugs.

Hayes and Wheelwright (1994) provide a useful framework that summarises choices for 

an organisation’s vertical integration strategy. The three main decisions are: