The Do's and Don'ts of Supply Chain Diversification

The reliability of global supply chains has recently come under fire after global events exposed underlying vulnerabilities in the global logistics system. These events sparked a series of disruptions that have challenged the conventional wisdom around global value chain theory. 

These recent disturbances have amplified the importance of strategic risk management, with supply chain diversification emerging as a pivotal strategy. By distributing risk across various sources and regions, diversification can defend businesses against abrupt disruptions, helping to bolster continuity and fortify operational resilience.

However, diversification is not a one-size-fits-all solution. It must be implemented with strategic foresight, comprehensive planning, and meticulous execution. So, to navigate the complex path of diversification, here are some critical do's and don'ts.

What Is Supply Chain Diversification?

Supply chain diversification is primarily a risk management strategy. Typically, a company will expand the number of suppliers it uses for raw materials, components, and finished products. But it's not just about adding more suppliers into the mix. Diversification also considers the entire architecture of the value chain, factoring in elements like: 

• Where suppliers are located
• Where production is conducted
• How this changes throughout the year
• What specific factors might threaten their continuity

The ultimate goal of supply chain diversification is to reduce the risk of over-dependence on any single supplier or component of the supply chain. By spreading risk around, you make supply chains more robust and less susceptible to cascading disruptions. 

That said, while risk management is the primary purpose, it’s not the only one. Diversified supply chains can also help companies achieve lower prices, improve delivery and quality, and foster innovation. 

The end result is a stronger, more resilient supply chain for every participating company up and down the value chain. Plus, for the end consumer, it can result in lower prices, greater product variety, faster shipping, and more reliable access to the products they depend on.

Supply Chain Diversification Is Not Supplier Diversity

It’s important to note that supply chain diversification is not synonymous with supplier diversity. While both can be valuable strategies, they serve different purposes. 

Supplier diversity refers to the business practice that seeks to include suppliers in designated classifications in the supply chain. Harvard Business Review defines this as:

“A business that is at least 51% owned and operated by an individual or group that is part of a traditionally underrepresented or underserved group. Common classifications are small-business enterprises (SBEs), minority-owned enterprises (MBEs), and woman-owned enterprises (WBEs).”

Supply chain diversification is simply about widening the supply base and mitigating risk by not relying on a single or limited number of suppliers or geographical locations.

How to Implement a Supply Chain Diversification Strategy

While the supply chain diversification process may look different for each company, generally speaking, here are four steps you can take to start the process: 

1. Understand your current supply chain – Before you begin, it's critical to have a comprehensive understanding of your existing supply chain. This entails mapping your entire supply chain from raw materials to finished products, identifying key suppliers, and recognizing critical nodes that, if disrupted, could have a cascading effect.
2. Identify gaps and vulnerabilities – The next step is scrutinizing the supply chain to identify weak spots. Are there single points of failure? Are there suppliers or regions that pose a particular risk? Identify these gaps and then extrapolate on their potential impact along the chain.
3. Define future requirements – What do you need from a future supply chain? This could mean different things depending on your industry, the size of your company, your customers, and your specific risk tolerance. It could include having suppliers in different geographical regions, diversifying modes of transportation, or increasing the number of suppliers for certain key components.
4. Secure buy-in – Successful supply chain diversification requires buy-in from all relevant stakeholders, including management, employees, and existing suppliers up and down the value chain. 

With support from all stakeholders, you can then begin to develop actionable strategies to address the identified gaps and build a more resilient supply chain.

Negotiating with Suppliers

Effective negotiation with suppliers is pivotal in diversifying your supply chain. First, always do your homework: research the supplier's market, competitors, and cost structures. 

Next, align your team's needs and wants — know what you need from the supplier, what you're willing to compromise on, and what are non-negotiables. 

Establish a clear walkaway position. If negotiations aren't satisfactory and in alignment with your critical needs, be prepared to leave the bargaining table in search of other options. 

Lastly, always consider the supplier's perspective. Understanding their needs and constraints can often pave the way for mutually beneficial agreements.

Negotiating with Suppliers

Whether you’re considering new suppliers or re-evaluating your existing mix, the ideal moment to make supplier changes is when you are not entrenched in a process where you are currently dependent on them, and you have time to fully consider your options.

But what are the red flags to look for as you begin the evaluation? Common issues to be wary of include: 

• Poor performance – With existing suppliers, look out for problems that might signal inherent flaws in operation, such as decreased product quality or consistent delivery delays.
• Financial issues – If a supplier shows signs of financial instability, it's a red flag. It may indicate they might not be around for the long haul or could have issues delivering as promised.
• Disaster-prone location – If a supplier is located in an area prone to natural disasters — earthquakes, hurricanes, floods, or fires — it may pose a risk to your supply chain. 
• Location vulnerable to epidemics – The COVID-19 pandemic underscored the massive disruptions a disease outbreak can trigger in supply chains. If a supplier is located in a region prone to infectious diseases or recurring epidemics, it may be wise to move elsewhere.
• New management – New management can bring drastic changes to established processes and procedures that threaten your supply chain if not properly managed. 

If you recognize any red flags, ask about these issues and evaluate the supplier’s answer to ensure you feel confident in their solution.

CMTC: Your Supply Chain Management Partner

In light of the ongoing issues occurring throughout global supply chains, supply chain diversification helps businesses reduce their risk and create redundancy up and down the value chain. 

But remember, you must be judicious as you approach this problem. If you need help, CMTC can provide the expertise and support you need to optimize your supply chain.

To learn more about our services, reach out today.