Vertical Integration

Vertical Integration and Managing Manufacturing Costs

By Andrea Stamm

ACC202: Principles of Managerial Accounting (ABR1114A)

Instructor:  Susanne Elliott

Ashford University

May 2, 2011

      Vertical Integration and Managing Manufacturing Costs

      There are many options as far as the manufacturing of a company’s products, the most cost effect is vertical integration.   The example I will be utilizing to go over these types production and distribution types is the Nature’s Tough line at Kwik Trip stores.   A company that utilizes vertical integration controls every part of creating and distributing it’s own goods.   There is another option known as outsourcing, when an outside source is utilized for any or all parts of manufacturing and distributing a product.

      Kwik Trip is a chain of convenience stores, spanning Iowa, Wisconsin and Minnesota.   They are a prime example of vertical integration.   The Nature’s Touch line of products is handed from every step totally in house.   Kwik Trip has its own dairy farm, processing and bottling plants.   They even refuse to outsource deliveries.   This means that at no point during the entire process does Kwik Trip have to pay any other company for a portion of the work.   Whenever the “middle man” can be eliminated it will benefit the retained earnings for a company.   This in turn leaves room for lower prices, without taking a large chunk of the company’s profit margin.   In turn lower prices are a driving factor for bringing customers into the stores.

    Outsourcing is paying another company or entity to handle the raw materials, product, or distribution of one company’s goods.   For example if Kwik Trip was to pay an outside company to bottle or distribute their Nature’s Touch products.   This would mean that the other company would need to make a profit and pay its employees as well.   This is more money that is coming out of Kwik Trip.   Outsourcing can also be as simple as just purchasing the... [continues]

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