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