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Depth of added value: definition & important aspects for buyers
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Depth of added value in a nutshell:
The depth of added value describes the proportion of the total value of a product or service produced in-house in relation to purchased services. For purchasing, it is a strategic lever for optimizing make-or-buy decisions and directly influences the procurement volume and supplier structure.
Example: A car manufacturer reduces its vertical integration from 45% to 35% by outsourcing seat production to specialized suppliers, which increases the annual purchasing volume by 250 million euros and reduces production costs by 15%.
Contents
What is vertical integration?
The vertical integration describes the proportion of the entire value chain that a company covers itself. It indicates how many production steps - from the procurement of raw materials to processing and sales - are carried out internally. A high degree of vertical integration means that a company controls many processes itself, while a low degree of vertical integration indicates a greater degree of outsourcing of activities to external partners.
Core components of vertical integration
Significance for purchasing
In purchasing, the depth of added value has a significant influence on a company's procurement strategy. A low level of vertical integration leads to a greater need for external suppliers and services, while a high level of vertical integration places the focus on internal resources. Buyers must therefore assess which components are strategically important and whether they are better produced internally or sourced externally.
Depth of value creation: from traditional in-house production to global value creation networks
Building on the theoretical understanding of vertical integration, it is clear in practice how crucial the strategic design of in-house production is for a company's success. Globalization and technological advances have led to companies having to realign their value chains. Increased competitive pressure and fast-moving market demands require flexible and efficient production models, which justify the need for a change from the traditional approach to modern value creation networks.
Old: Traditional in-house production
Traditional approach: In the past, companies increasingly relied on a high degree of vertical integration and carried out numerous production steps internally. This strategy was based on the assumption that control over the entire production process would lead to higher quality and cost efficiency. Factories were vertically integrated, workers were multi-skilled and significant investments were made in machinery and equipment. However, this approach led to high fixed costs, low flexibility and slower innovation. Tying up capital in equipment and inventories also limited financial flexibility.
New: Global value creation networks
Value networks: Modern companies are transforming their business models into global value networks. By focusing on core competencies and outsourcing ancillary processes to specialized partners, the depth of value creation is being reduced in a targeted manner. Innovation-promoting technologies such as Industry 4.0, cloud computing and digital platforms enable the seamless
Conclusion on vertical integration
The depth of added value is a key strategic factor for a company's success. The optimal balance between in-house production and external procurement enables companies to strengthen their core competencies and at the same time benefit from external partnerships. Careful analysis of costs, risks and strategic advantages as well as continuous adaptation to changing market conditions and technological developments are crucial.
