Most businesses have multiple stages of production operated by different entities. In orthodontics, most of us purchase wires and brackets from a manufacturer while we deliver patient care. Similarly, many of us outsource several laboratory functions to outside labs. Whether you outsource to your clear aligner company or to a lab that makes your RPE’s, there are clear stages of production and integration channels in orthodontics.
Backward Integration
As technology has evolved and costs of entry into 3D printing and additive manufacturing have dropped, there has been a larger push towards integrating the supply chain and more vertical integration on the part of orthodontic practices. When a company expands backward on the production path into manufacturing, the term used is backward integration. The most common method of backward integration is in-house clear aligner manufacturing. We are also starting to see this vertical integration into bracket manufacturing. Companies are developing biocompatible resins that can be used to 3D print custom brackets and disrupt the traditional sales of mass-produced fixed appliance systems.
Forward Integration
Forward integration occurs when a company expands by purchasing and controlling the direct distribution of its products. Corporate entities have also added vertical integration seeing an opportunity to leverage their sales and distribution channels. They can contract doctors independently from this channel and integrate their direct-to-consumer marketing, manufacturing appliances, and direct-to-consumer distribution. This market segment has seen a boom in the past few years. It is a clear example of labs implementing forward integration as they see an opportunity to disrupt the traditional doctor-to-patient relationship.
When contemplating vertical integration, we should consider a spectrum of integration, and there can be a risk on both ends of the equation. Learn when and when not to integrate vertically.
Advantages of Vertical Integration
- Decreased shipping costs and reduced delivery turnaround times
- Reduced supply disruptions from suppliers that might have capacity issues
- Increased competitiveness by getting products to consumers directly and quickly
- Lower prices by absorbing laboratory profits: lowering per-unit costs
- Improved sales and profitability by creating and selling a company-owned brand
Disadvantages of Vertical Integration
- More challenging to scale where the in-house lab might get too busy and mismanage the overall process
- Outsourcing to suppliers and vendors might be more efficient if their expertise is superior
- Costs of consumables and labor costs may be at a premium
- Support and maintenance can be disruptive to the practice
- Excessive doctor time involved if not delegated appropriately
- Additional space for a growing lab
So when we outsource, we delegate to a manufacturer’s core competence. This process is easier to scale and has the potential for increased efficiencies at scale. There are decreased equipment expenditures and no equipment maintenance.
Bringing appliance manufacturing in-house allows you to control the process, reduce costs, reduce delivery time, and offer the opportunity to sell your personalized brand of appliance.
When you consider vertical integration in full or as a hybrid of in-house and outsourcing, my key advice is: What is your interest? Are you willing to commit time and resources to develop systems, train your team and focus on quality control in manufacturing? The manufacturing process can take orthodontists out of their core competency, and it is critical to avoid diminishing returns when a process inefficiently uses valuable doctor and team time.
