How to Diversify Your Supply Chain to Build Resilience

Since the 90s, the world has globalized at a blinding pace! With consumer demand at an all-time high, constant supply chain disruptions, and the volatile nature of modern geopolitics; the global supply chains we have relied on are starting to feel pressurized. We do have an answer to this problem. And it lies in supply chain diversification.

Table of Contents

• What is Supply Chain Diversification?
• Building Resilience with Diversification in Supply Chains
• The Benefits of Supply Chain Diversification
• How to Diversify Your Supply Chains
• What is Supply Chain Diversification?

At its simplest, supply chain diversification is about expanding the choices businesses have in procurement from a larger circle of manufacturers, from diverse locations. It provides buyers with an abundance and flexibility of suppliers to choose from. This expanded choice lets buyers build resilience in their supply chains which further strengthens their business helping them grow.

Diversification is an important requirement for any modern supply chain since they are highly dependent on global trade lanes. However, over the past 5 years, supply chain delays and disruptions have been increasing at an exponential pace affecting these trade lanes drastically.

The biggest disruption of them all, the 2020 pandemic, proved the need for global supply chain diversification. For example, At the start of 2020, more than 90% of essential medical goods in America were being imported from China.

To add fuel to the fire, consumer demand skyrocketed in the post-pandemic era continuing the shock supply chains faced in 2020. “Out-of-Stock” became the order of the day!

While a diversified supply chain could not have completely prevented delays or disruptions, it would have certainly helped businesses mitigate the impact of these disruptions. Supply chains which were diversified from the beginning managed to drive profits despite the challenging times they were in.

Building Resilience with Diversification in Supply Chains

The final goal of supply chain diversification is to create a more resilient supply chain. Before you can get to it, you must understand what parts of your supply chain you must diversify. Here’s how you must begin:

Identifying Key Nodes

The first step is to identify key nodes that require diversification. You need to know what you’re trying to protect from disruption. Is it a trade lane in a particular geography? Is it the supply of a particular product? Is it the raw materials you require?

Identifying the nodes that need strengthening will help you identify the first areas of your supply chain you need to diversify.

Defining Risks

Supply chain disruptions can originate from anywhere in the world. From a worker strike in a mine to last-minute congestion at ports.

A business needs to identify risks to its supply chains. Procurement offices often create risk appetite statements that provide a good view of the risks your supply chain may or not face.

Maintaining Critical Relationships

Diversifying supply chains is an expensive process for any business. Just because your business is creating a more diversified supply chain does not mean that your current suppliers will follow.

Maintaining relationships with existing suppliers is an important strategy to build proper relationships. If your partners are not able to meet your new supply chain requirements, you could support their diversification strategies and/or reduce your dependence on them.

Ownership

Use your Incoterms effectively! Creating resilience by diversification will lead to you creating new multi-supplier relationships, across geographies spread out in various trade lanes.

Who’s responsible for investing in what part of your revamped supply chain? Who is responsible for taking care of the logistics? Who will pay the price if goods get damaged? Your business needs to answer these questions correctly whenever they are raised.

The Benefits of Supply Chain Diversification

Apart from helping businesses cope with increasing disruption and supply chain delays, supplier diversification has a net positive impact on your business. Here are some of its major benefits:

Encourages innovation: Diversification helps you have more choices among your suppliers and helps you build new processes for your supply chains. Creating a proper strategy for diversification will allow you to innovate and introduce new, more resilient supply chain strategies.

Cost Effectiveness: The right diversification in your supply chains can actually help reduce costs in the long run. For example, creating a supply chain that utilizes less crowded trade lanes is an effective strategy to drive down shipping costs for your supply chains.

Supplier Competition: If you start procuring your required products from multiple suppliers, market competition among them will drive down your raw material cost. A healthy competition between your suppliers will improve your ROI.

Sustainability: Sustainable supply chains are the talk of the day among supply chain industry experts. A diverse supply chain is able to sustain itself despite potential disruptions and delays.

Better Visibility: Changing global trade regulations have created a need for visibility within supply chains. A proper ‘paper trail’ of your suppliers and trade lanes can be requested by governments around the world.

This visibility also helps you optimize your supply chains and find new suppliers for your diversification strategy. Solutions like Trademo Intel can help you gain this visibility easily with the help of global supply chain data.

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How to Diversify Your Supply Chains

Businesses that want to stay on top of their game will have to pivot towards a different approach in procurement by seeding supply chain diversification into the DNA of their operations. They can do this by:

Moving from large to medium/small-sized suppliers: Historically, businesses have preferred to choose large multinational partners as their suppliers. Such manufacturers promise reliability through their worldwide reach and some legal advantages including the minimum likelihood of closure. However, shifting sourcing to SMEs can offer other benefits.

Primary among them is the flexibility and greater value for money due to lower administrative and management costs and greater innovativeness. Finding these suppliers can be a challenge. However, Trademo’s supply chain data & research platform can help. Here’s how Jans Food uses it to find new international suppliers for their product categories.

Diversifying across a range of economies: In the context of the US-China trade wars, and the greater readiness buyers feel in considering alternatives to China in a post-COVID world, businesses should consider shifting their sourcing to a wide range of economies.

Developing economies in East Asia & Africa such as Indonesia, Vietnam and Nigeria have undergone extensive economic transformations and offer room for new opportunities.

Fostering capacity building for new sourcing alternatives: However, shifting sourcing to alternative economies needs to be gradual and followed by required investments.

To smoothen the transition, donor countries and businesses can consider working with new host countries/suppliers to help redesign their development priorities to build their production capacities; improving fiscal policy; and strengthening the rule of law to simplify legal codes around land acquisition, tax codes, labor rights, and bankruptcy policies, etc.

Summing Up

With how things are, no business can sustain its supply chains without supply chain diversification. As it stands currently, diversification is a necessity.

Sure, the initial cost of diversifying is expensive, but it can help improve the overall performance of your supply chains. So don’t wait, diversify your supply chains today.