While assured quality, timely delivery, and savings on transportation costs are clearly the top three advantages in having a vertically integrated operation, today the availability of raw material has turned out to be a crucial benefit for such companies.

"In the last year or so, yarn prices increased and the spinners have made good profits," said Amit Gugnani, Associate Vice President at Technopak Advisors, a management consulting firm. "Most large companies today understand that price offering to the customers can be controlled better by vertically integrated operations than being standalone apparel manufacturers. It helps them control the costs at various points of the supply chain and maintain a reasonable level of profits while meeting price expectations of the customers."

A few years ago, around 20 companies in Tirupur, including the country's leading knitwear exporters Eastman Exports Global Clothing and KPR Knits, opted for backward integration and invested in spinning mills and processing plants, while many, including Tirupur Exporters' Association president A Sakthivel's Poppys Knitwear, went for processing facility alone.

Coimbatore-based 800-crore KPR Mills, which opted for backward integration and started four spinning mills alongside its knitwear units, is today comfortable in its raw material position as it produces nearly three times more than its cotton yarn requirement. "It is always advantageous to have vertically integrated operations as the supply chain is complete. We only need to buy cotton, and it goes out as a value-added product. Whereas in separate businesses of spinning, dyeing, and garmenting, there will always be ups and downs, and we may have to face difficulties during certain periods, and few products might go out of the market," said 1,000-crore Eastman Exports Global Clothing's Chairman and Managing Director N Chandran.

Further, he said that the company can be flexible with the order quantity as it need not outsource any work that might require a minimum quantity. "Buyers can also believe in timely delivery of orders as fabric will come out as a garment from one place," he added.

Recently, hosiery major Dollar Industries has acquired a spinning mill in Tamil Nadu at an investment of 65 crores as part of its backward integration move. The company has also acquired a processing unit at an investment of 10 crores. Vinod K Gupta, Managing Director of Dollar Industries, said: "Owning a spinning mill will help us save a VAT of 4% on cotton yarn, which we paid till date as we did not have any spinning facility."

Originally published in The Economic Times dated Dec 10, 2010, by S Sujatha & Sutanuka Ghosal, Coimbatore/Kolkata