Team:UCSC/VI
Vertical Integration
Determined to lower costs, our team sought out to explore age-old concepts for achieving cost reduction. Recalling the strategic business practices of John D. Rockefeller, our team decided to learn more about vertical integration and how it can lower costs. Vertical integration is the expansion of business operations to control multiple stages within the production or distribution of a product or service, such as a home appliance company building a manufacturing plant for the electronics, creating a supplying service to transport the product, and owning retail stores to sell the appliances; rather than simply purchasing electronics, assembling them into an appliance, and selling the appliance to suppliers. What initially piqued our interest in exploring vertical integration was our decision to build our own autonomous bioreactor. Restricted by the high costs of existing units, our team recognized that we could build our own fully operational bioreactor for a significantly reduced cost, thereby reducing the cost of our research. While our bioreactor would obviously not be implemented in the real-world manufacturing of erythritol, it can be argued that reducing research costs dramatically reduces costs of products on the market by spurring innovative processes and methods for production.
In order to better understand vertical integration, we decided to speak with Hormoz Ghaemmaghami, the founder of Hydraulics International Inc. Hydraulics is a leading worldwide supplier of Aircraft Ground Support Equipment (AGSE), a highly competitive market focused on providing military and defense technologies to government agencies and contractors. Founding Hydraulics in 1976, Hormoz went on to purchase Flowmetrics, the manufacturer of flow-measuring instruments critical to testing Hydraulics’ products, and Greer, the leading manufacturer of ground support defense equipment at that time.
Hormoz described Hydraulics as a company that is highly vertically integrated, and he described this integration as a key advantage in Hydraulics' competitive edge. Hormoz mentioned that Hydraulics owns a machine shop that produces parts, a fabrication department which purchases and forms raw materials, a welding department which welds these parts, a painting department to paint them as per the customer’s request, and finally a testing department to test the finished equipment. When asked what the benefits of vertical integration offers, Hormoz noted that every company owns a president, vice-president, the entire management team, as well as the engineers and other employees throughout the company. Whenever Hormoz in-sources a product from another company, he is essentially paying the salary of that president, along with the management team and so on; and therefore the cost is essentially doubled. Vertical integration, on the other hand, lends itself to reduced cost by assembling the product all under one roof. Additionally, it allows Hydraulics increased efficiency for prototyping and manufacturing in-house, as well as lends itself to higher quality assurance by not becoming reliant on others. Hormoz believes, however, that companies throughout the United States are becoming increasingly horizontally integrated rather than vertically, in that they focus upon one step in the production chain and become increasingly specialized in this one process.
Leaving this interview, the team felt confident in our decision to build our own autonomous bioreactor in-house. It would provide us not only a low cost solution during a time when we needed it most, but also it would grant us the opportunity to get hands-on engineering experience. Given the importance of electronics on the biotechnology and synthetic biology industry, we thought of this as a way to ‘vertically-integrate’ our knowledge as bioengineers and scientists, so that we may have a more comprehensive understanding on how to propose solutions to real-world problems.
