Ferrero Group is a confectionery manufacturing company which produces a line of chocolates and chocolate spreads with hazelnut as the main ingredient. The company is the largest buyer of world hazelnuts (25%). The company procures hazelnut from Oltan, the world’s largest manufacturer of processed hazelnuts with a market share of 25% to 30%. Ferrero purchases almost 70% of Oltan’s hazelnut production. Recently, there was crop damage owing to which the harvest of hazelnut crop is low. This has increased the prices of hazelnut. One of the customers (Esha in the case) is concerned about the price increase of Nutella owing to such hazelnut supply issues. Hazelnut is a major ingredient of this chocolate spread. Esha is considering Ferrero’s vertical integration, in which it may decide to purchase large producers such as Oltan. Further, she is also evaluating the implication of such a strategy on final market prices of Nutella.
The short case is intended for use in a course on supply chain management or global operations. This brief case can be used to support the theory session on sourcing or vertical integration strategy. The teaching objectives are (1) discuss the advantages and disadvantages of vertical integration strategy; (2) discuss the criteria for decision making of “vertical integration” vs. “no vertical integration” strategy, (3) final assessment of “vertical integration” vs. “no vertical integration” strategy and (4) discuss various other strategies where firms may gain better control over upstream supply.