At River Rouge, Michigan, Henry Ford set up a company that would produce a million tractors a year. It was to include a blast furnace that would allow him to bring iron ore in on boats and turn the ore into steel, then into the tractors’ component parts, and the tractors would drive out of the other end. The plant also had shipyards, sawmills, concrete plants, and tanneries; this process was called “vertical integration.”
Ford did not want to be dependent on any outside suppliers at all. But there was one raw material that he did not control: rubber, which was controlled in Malaya and Sri Lanka by British agents.
So in 1927, Henry Ford, now the richest man in the world, bought a tract of land twice the size of Delaware in the Brazilian Amazon. His intention was to grow rubber for the wheels for his new Model T cars. In some ways, this was just an extension of his assembly line, one which now started in the fertile soil of the Amazon.
It ended in disaster, and the shells of his houses, chapels, schools, and hospitals can still be seen poking out of the resurgent rainforest. For some, this ended the vision of the vertically integrated company, with raw materials coming in one end and finished goods coming out of the other.
What we see now could not be more different. Companies often own no assets, buy no raw material, and hardly have anyone on the payroll. Apple doesn’t make anything. Facebook’s main assets are the habits and preferences of its customers. Boeing doesn’t make the cockpit on its own aircraft.
But many IT systems are still set up for the age of the vertically integrated company, because they focus only on the processes inside a company. But with most of the value created externally, this approach will always be inferior to a network-based value chain management approach, where the vital assets, intellectual property, and information from customers, suppliers, and stakeholders can be managed as effectively as Henry Ford managed his factories.
You don’t need to wait: Ariba Network is already doing with companies like Coca-Cola, FMC, Microsoft, Emirates, and BASF. Learn how Ariba is powering the world’s global supply chain.