What is Backward Integration?
Backward Integration refers to the process through which a corporation buys or joins with other companies that produce the raw materials it needs to make its final outcome. Incorporating the supply chain into their continuing operations allows the organizations to increase control over it.
Understanding Backward Integration
Many businesses work to improve their market competitiveness and raise their sales and profit ratio. Backward integration allows companies to fulfill their objectives through producing their local products and materials.
If one or more materials make up a significant portion of a company's manufacturing cost, the company has the financial resources to reduce it. The company does it through purchasing enterprises that manufacture those raw resources. Here, the company utilizes backward integration. Organisations can explore the possibility of backward integration by calculating how much material it takes for the manufacturers to make their goods. Extraction or agribusinesses are frequently used in the production of raw materials. People can know how much money they can save if they create their own materials using this method. The company then uses analytics to figure out which deal to make with the manufacturing company.
It might be advantageous for businesses because it saves money on raw materials. Sales may increase as a result, and the company revenue improves. In the end, businesses will have more influence over their possessions. Reduced reliance on vendors also facilitates quick delivery of raw materials.
Practical Example
A truck Company named Auto Limited buys a wide variety of materials from many sources such as steel for building vehicles, leather for seats, engine components, gearboxes, and so on. Backward integration occurs when Auto Limited company merges with or takes over an iron and steel manufacturer.
In Sentences
- Backward integration is widely used in businesses that allow them to combine with other business to get the raw material it needs.