Last Modified: 25 Apr 2018  |  Finance and Investments

The supply chain for real estate is a very intricate and complicated process linking together people, suppliers, distributors and manufacturing plants. As the various steps involved leading to the final completion of a project grows more elaborate, streamlining it becomes increasingly challenging. One of the solutions to managing such a complex chain is the technique of backward integration. Backward integration in real estate is proving to be a very effective way for developers to gain greater control over the supply chain, ensure higher quality and even cut down on manufacturing costs. Here’s how real estate companies today can stand to benefit from implementing backward integration in their processes.

What is Backward Integration?

  

Backward integration is when a company gains control over one or more steps in the production process, leading up to the completion of a finished product. Backward integration could mean tying up with an existing manufacturer/supplier or launching a new one entirely. For example, a grocery store can implement backward integration by purchasing a farm to cultivate produce that it can, in turn, sell to customers visiting the store. In real estate, backward integration could mean that a developer takes over the procurement of raw materials, sets up a manufacturing plant for various components required and acquires an architecture or interior design firm to design the final product.

Benefits of Backward Integration

Implementing backward integration can have several advantages for both real estate developers and their consumers. Some of the reasons why real estate companies should move towards backward integration are:

  1. Higher Profit Margins:

    A production process usually involves various parties, each contributing to a certain aspect of the final product. The supply chain for a real estate company will have suppliers of raw building materials like aluminium and concrete, manufacturing plants to convert these materials into usable building materials and various agents to oversee the developmental process. Each of these parties are looking to make a profit, and so they mark up their prices. Because of this, developers will need to charge their customers a higher price as well in order to make a profit.When a real estate developer adopts backward integration, however, they can cut down on all the marked up costs. As the entire production process is streamlined, profits are only calculated on the final product. This means that they can significantly reduce manufacturing costs and increase their profit margins.

  1. Greater Control over Supply Chain:

    When a real estate company has control over the entire manufacturing and development process, they can ensure that every step meets their quality standards. They also have more control over the timeline for delivery of projects as they can manage the manufacturing and building process. For end-customers, this means that they can have a higher guarantee of receiving the handover of their homes on time.

  1. Differentiates You from the Competition:

    In an increasingly crowded market, real estate developers are continuously searching for ways to differentiate themselves from their competitors. Backward integration can be a very useful strategy to help developers accomplish this. As they control the manufacturing process, they can find new innovations to set them apart and provide greater value to their customers.

  1. Become a Market Leader:

    Backward integration gives developers an edge over other real estate brands as they can give their customers a higher guarantee of quality and timely delivery. As backward integration also brings down manufacturing costs, real estate developers will be able to dominate the market by providing customers with the most competitive prices. Since affordable housing is the future of the real estate sector, this can help developers attract more customers. 

Backward integration in real estate can require time to set up as well as higher investments in the short term. However, the extra costs can be worth it as it will ultimately bring down overall cost of manufacturing in the long term. For consumers as well, backward integration can help make real estate investments more affordable as prices go down. Moving towards this form of vertical integration will help real estate developers adapt to the changing market.

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