Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.
Understanding backward chaining
Supply chains start with the sourcing of raw materials. These materials are then delivered to a warehouse or factory and then into stores for purchase by consumers.
The supply of raw materials is sometimes unpredictable and in short supply. As a result, these resources are highly prized and there is much competition among organizations in trying to secure them. Businesses use backward chaining to shore up these resources for themselves, eliminating all competition in the process.
- Efficiency. With greater control, businesses can streamline every aspect of the supply chain to suit their needs and preferences. The efficiency of backward chaining might reduce transportation costs and improve profit margins. In a retail context, a business with total control over its supply chain is better able to stand behind the availability of its products.
- Reduced costs. Traditional supply chains consist of one or more middlemen who charge a mark-up for their services. With the middleman removed, acquiring raw materials becomes cheaper and these savings can be passed to the consumer.
- Intellectual property acquisition. For example, backward chaining in the technology industry might see a business gain exclusive rights to trademarks, patents, and other proprietary information owned by their former suppliers.
- Cost. Backward chaining requires a substantial investment that not all businesses will be able to absorb.
- Reduced economies of scale. Normally, a supplier who supplies multiple businesses may pass on savings resulting from economies of scale. Since backward chaining reduces the number of individual units being produced, the company acquiring the supplier might face higher production costs.
- Manageability. Companies that acquire entire supply chains might become large and more troublesome to manage. Spread so widely, there core strengths and values may also become diluted.
Examples of backward chaining
Netflix started out as a DVD rental company with a focus on television and film. Eventually, the company employed backward chaining to acquire the rights to start making content themselves.
Ford Motor Company originally sourced key raw materials such as rubber, glass, and metal from suppliers. In order to protect its supply, Ford created several subsidiaries to control the supply of these materials, guaranteeing availability, and increasing quality.
Apple is also a proponent of backward chaining. Apple software is installed on electronic devices and operating systems that are owned by the company. Hardware and manufacturing facilities are also under-owned by the tech giant.
- Backward chaining is the process of a company acquiring other companies further up the supply chain, ostensibly to secure raw materials.
- Backward chaining is an effective competitive strategy because it increases efficiency and reduces costs. However, it does require large amounts of capital and has the potential to dilute a company’s brand.
- Backward chaining is common to many of the world’s largest and most successful companies.
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