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Integration happens when one company owns another business in its supply chain.

In order to turn raw resources, such as lumber or iron ore, into finished products such as houses or cars, it takes many different businesses, each contributing a small part of the whole. This process creates interlinked chains of businesses. As the product moves through the chain, it is said to move downstream.

For example, lumber must be cut, moved to lumber mills, cut into useable planks, treated, moved to lumber yards, bought by builders, moved to construction sites and constructed into houses before the homes can be sold to final buyers.

Integration happens when one company owns another business in the chain. If a company owns a supplier, this is backward integration. If it owns a company further down the chain, that is forward integration.

Bob’s Bicycles buys metal tubing, bike seats, and components from suppliers. It also sells bicycles to several distributors, who sell the bicycles to retail stores. If Bob’s buys its bike seat supplier, that is backward integration. If it buys a retail bike store, that is forward integration.

Companies will use backward integration when it results in cost savings, improved efficiency, guaranteed supply or another benefit. For example, if bicycle seats are in short supply, Bob may buy the seat maker to guarantee his supply.

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