In today’s global economy, manufacturing is often an intercontinental process.
Casey BowesCompanies frequently outsource key production steps to create products and fulfill customer orders.
The supply chain often bears the brunt of this approach, causing some companies to reexamine what it might look like if all the pieces were under one roof. What benefits might customers and distributors enjoy? Could vertical integration transform operations and deliver better service and better products—and deliver them more efficiently?
We faced this question at Finish Thompson, a global manufacturer of corrosive chemical transfer pumps, and wondered why we chose to implement a full-scale vertical integration process that has allowed our customers to reap the benefits.
Why Vertical Integration Makes Sense
As a company grows, it can grow up or grow out. To expand operations, manufacturers often need to rely on multiple parties to complete their product lines and serve their customers; that’s growing out. It can be effective, but it misses some key benefits, particularly vertical integration.
That is how it was here at Finish Thompson. In a company our size with multiple product lines, we compete with more established companies dedicated to only one product. This can be difficult cash-wise, as our large product breadth requires us to maintain a large inventory of finished goods.
We had previously relied on suppliers and third parties, and while we experienced good growth, we found that suppliers could not keep up with the growth trends and could not anticipate or scale up supply abilities in time.
To address this, we first moved towards increased vertical integration by investing in vertical milling centers (VMC), computer numerical control lathes (CNC), and other automated machines to supplement a small existing, mostly manually operated machining center. Almost overnight, our manufacturing became nimbler. We could respond more quickly to our customer’s needs and better manage the cash kept in storing finished goods.
Over the last decade, our push toward vertical integration has increased. We have focused on bringing much of our manufacturing in-house, significantly expanding our capabilities. By investing heavily in equipment and expansion of our manufacturing facility, Finish Thompson can now design a product, prototype it, make tooling for it, complete the injection molding process, machine it, paint it, and ship it – all within the walls of our Erie, Pennsylvania, facility.
The investment in vertical integration has enabled both customers and distributors to reap a variety of benefits, including:
- Speed and efficiency: Distributors and customers enjoy faster delivery due to shorter run times and fewer supply-chain issues.
- Quality control: Products are more reliable because everything is subject to consistent quality control (QC) processes rather than multiple vendors. This is a key benefit for our customers, especially those suppliers who place the highest value on QC and conduct rigorous QC audits on an OEM supply basis. One example is a large supplier of air conditioners for high-end recreational vehicles and yachts. The specific application required tweaks to standard products to meet their specifications. Our vertical integration model's flexibility and versatility made it possible to react to the need for modification. Another example is an international aerospace firm that is making a new energy storage product that uses a pump to transfer battery electrolytes. After experiencing issues with electrical charge jumping, we were able to quickly modify parts to modify the path of resistance and change the construction materials to eliminate the potential problem.
- Responsiveness: With in-house tooling, machining, and prototyping, teams can respond quickly to specific customer needs and dynamic industry demands, including the ability to customize wholly unique products. In-house 3D printing means that we no longer must send prototypes out to be made in aluminum. Instead, our customers can get their prototypes in as little as a day, with various parts in different sizes and construction materials.
In addition, recent geopolitical turmoil has made companies wary of what had become the established global trade/supply chains. Doing as much as possible in-house is now seen as a prudent alternative. At the same time, vertical integration enables Finish Thompson to respond to customer desires for cost-competitive products that are made in America.
Three Keys to Achieving a High Level of Vertical Integration
Achieving a high level of vertical integration has required investment in three key areas—machinery, space, and workforce. Equipment upgrades have included seven new, state-of-the-art injection molding presses. To support this process and keep a US-based mold tooling capability, Finish Thompson has also invested in a tooling room and tooling production equipment. This allows production teams to significantly speed up production. Mold tool development that would have taken four to six months in the past with outsourcing can now be accomplished in three to four weeks in-house.
Investment in a 3-D printer enhances the in-house research and development capability. Prototyping, which was previously outsourced, can now be done very quickly. Parts can be run overnight, and engineers can test it the next day. We have a team of eight engineers dedicated to the R&D of new products. All products are designed and engineered at our Erie plant.
Of course, all of this new equipment requires space – and employees to run it. Over the past eight years, we have doubled our capacity, buying up neighboring land and expanding our facility from around 30,000 to nearly 80,000 square feet. During that period, our workforce has grown by 300 percent.
Return on Investment Calculations Support Vertical Integration
At every step in the drive towards vertical integration, rigorous cost-benefit analysis/return on investment (ROI) studies were performed to evaluate the potential effects of possible investments.
For example, our manufacturing department conducted an ROI study for an operation that glued magnets onto a metallic ring used in large centrifugal pumps. The process is often achieved by manually gluing magnets onto the ring, a difficult and time-consuming job that would likely have had to be outsourced. Instead, we invested in a soon-to-be-deployed automated robotic magnet gluing procedure.
Another good example is the production of injection-molded plastic parts. While the company had some tooling molds, many parts had to be made in China and could take up to six months to arrive. After establishing the tool room, hiring personnel, and purchasing injection molding tools, we could get to market quicker and produce more products in a calendar year.
Future Trends Supporting Vertical Integration
Three key trends will have an important effect on vertical integration in the corrosive chemical transfer pumps market. One is the environmental trend banning materials used in products for corrosion resistance, including per- and polyfluoroalkyl substances (PFAS). Many are looking at alternatives as they develop new products, which will require a serious focus on prototyping.
The second trend is chip manufacturing changes from the CHIPS and Science Act of 2022, which resulted in new semiconductor chip manufacturing facilities in Ohio. Vertical integration will enable a quicker turnaround for OEM products needing highly customized configurations and construction materials.
The third trend is the huge increase in the use of large-flow batteries in solar, windmill, and server farm applications. Customers storing surplus energy require using pumps that must be carefully configured. Server farms require flow batteries for the backup generator, and they often cannot use off-the-shelf pumps due to the amount of flow and pressure in the connection. Most large competitors cannot make modifications to meet these specific needs, whereas the in-house vertical integration model supports the speed and adaptability required to serve this market.
It all concludes that vertical integration can lead to greater efficiency, improved quality, and reduced supply-chain issues.
Casey Bowes is the owner/CEO of Finish Thompson Inc. in Erie, PA. Visit https://www.finishthompson.com
