Vertical Integration and Outsourcing

Family Dollar shows more signs of backwards vertical integration by moving up the supply chain to do more direct imports. There was a time when all goods were bought through domestic wholesale companies who stocked goods and domestic manufacturers. As the global economy changes to oversea production there are more trading companies, buying agents and subcontractors that are helping to cut margin out of the supply chain to give there customers better value. Right now with the economic recession consumers are more likely to adopt private brands and off label brands to save money. These types of changes in consumer taste are likely to fuel Family Dollar to get closer to the source by outsourcing merchandising functions to 3rd parties. These 3rd parties don’t have the overhead of stocking distributors and can operate on lower margins and they add value to Family Dollar by not having to hire more people to do this job to realize savings. It also shifts product liability from Family Dollar to the 3rd parties.

Having there own warehouses and distribution centers is another way Family Dollar can show vertical integration to save money by not outsourcing these services. They have 9 DC’s in the following locations: Matthews, NC; West Memphis, AR; Front Royal, VA; Morehead, KY; Maquoketa, IA; Odessa, TX; Marianna, FL; and Rome, NY. I am sure these locations were picked from the geo-demographics that combine central locations in small communities with low overhead costs o serve their 6,800 locations.