Geographical and Functional Integration

Functional integration aims at linking more efficiently elements of the supply chain, namely to insure that the needs of the customers are closely met by the suppliers in terms of costs, availability and time. A functional complementarity is established through a set of supply / demand relationships involving physical flows between parts and raw material suppliers (S), manufacturers (M) and distributors (D). Efficiencies, and thus economies, are achieved through the principle of flow. In this flow-based system, demand is synchronized more closely with supply, imposing a reorganization of freight distribution. This causes a paradigm shift in logistics, where freight distribution evolves from inventory-based logistics (“push” logistics) to replenishment-based logistics (“pull” logistics).

Geographical integration aims at using the comparative advantages of space, namely to insure a better access to markets, labor, parts and resources. A spatial complementarity is established through a set of origin / destination relationships between the actors of a commodity chain (S, M and D). Economies are achieved through the principle of location where each actor seeks to find cost and/or income effective locations. Thus, in a conventional situation production systems tended to have a regionally oriented location of its components (1) and finished goods could be exported. With geographical integration, spatially fragmented commodity chains can emerge, where each element can undertake a locational choice to maximize efficiency (implying the use of locations 2, 3 and 4). The function of distribution may also be expanded to cope with this geographical specialization, with the complexity of physical flows, namely in terms of a growth in tons-km.