Integration central to Kenyan manufacturing sector’s growth

Netflix is a firm that has used backward integration to expand its business. FILE PHOTO | AFP

The contribution of the manufacturing sector to the GDP has stagnated at below 10 percent despite various government interventions, including the Big 4 Agenda of the last administration.

The stagnation or decline can be attributed to a number of factors, including supply chain management challenges.

For Kenya to experience industrial transformation, it must commit itself to building, creating, adding value and taking pride in local industries by developing integration policies that would enable firms to benefit from economies of scale, complementary portfolios, operational synergies, and cost savings.

Backward integration is a form of vertical integration where a company buys another company that supplies its products or services needed for production. Such a relationship often results in acquisition or mergers.

One example is the merger between Glaxo Wellcome plc and SmithKline Beecham plc to form GlaxoSmithKline plc. in January 2000.

Amazon.com Inc., Apple inc. and Netflix are some of the examples of firms that have used backward integration to expand their businesses.

These companies no longer rely on third parties to deliver services, instead, they have their own logistics service providers.

The use of backward vertical integration has been a great success and allowed these companies to advance their new products and technology at a more rapid pace.

Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. Costs can be controlled significantly from production through to the distribution process.

Through control of its supply chain, firms can bring down the costs as well as guarantee access to key materials such as access their raw materials.

Backward integration cuts transportation costs, improves profit margins and makes the firm more competitive.

Firms can also gain more control over their value chains increasing efficiency and gaining direct access to the materials that they need.

In addition, they can keep competitors at bay by gaining access to certain markets and resources.