The Functional and Geographical Integration of Value Chains

The Functional and Geographical Integration of Value Chains

Source: adapted from Rodrigue, J-P (2006) “Transportation and the Geographical and Functional Integration of Global Production Networks”, Growth and Change. Vol. 37, No. 4, pp. 510-525.

Functional integration aims at linking more efficiently elements of the supply chain, namely to ensure that suppliers closely meet the requirements of customers in terms of costs, availability, and time. A functional complementarity is established through a set of supply/demand relationships involving physical flows between parts and raw material suppliers (S), manufacturers (M), and distributors (D). Efficiencies, and thus economies, are achieved through the principle of flow. In this flow-based system, demand is synchronized more closely with supply, imposing a reorganization of freight distribution and inventory levels. This causes a paradigm shift in logistics, where freight distribution evolves from inventory-based logistics (“push” logistics) to replenishment-based logistics (“pull” logistics).

Geographical integration aims at using the comparative advantages of space, namely to ensure better access to markets, labor, parts, and resources. A spatial complementarity is established through a set of origin/destination relationships between the actors of a supply chain (S, M, and D). Economies are achieved through the principle of location where each actor seeks to find cost or revenue effective locations, namely through outsourcing and offshoring. In a conventional situation production systems tended to have a regionally oriented location of its components (1) and finished goods could be exported (a regional value chain). With geographical integration, spatially fragmented supply chains can emerge and where each element can undertake a locational choice to maximize efficiency (implying the use of locations 2, 3, and 4; a global value chain). The function of distribution may also be expanded to cope with this geographical specialization, with the growing complexity of physical flows, namely in terms of growth in tons-km. This often requires the setting of intermodal transport chains.