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Definition: Downward Vertical Integration
Downward Vertical Integration refers to a strategy adopted by a company where it buys the suppliers who provide raw materials. It is also called as Backward Vertical Integration. This is done with an objective to reduce costs & improve lead times.
The following diagram represents the typical supply chain of a company.
In vertical Integration there are two types – (1) Downward & (2) Upward. When a company buys the upstream members in the supply chain, it is called as Downward Vertical Integration. A company will adopt this strategy to buy its suppliers when it wants to have a hold on raw materials procurements especially when the factors of price, quality & supply cycle time plays a very important role in the operations. However this strategy will not be appropriate at all times especially when the supplier through economies of scale can provide the raw materials at a lesser cost than what it would take if the company itself produced the raw material.
One example of this is the acquisition of Labrador Iron Mines by Tata Steel in 2013. Since Tata steel wanted to improve its raw material security and to reduce the transportation cost, it acquired the company.