Why Supply Chain Diversification Is Key to Building Resiliency

Not so long ago, businesses were scrambling to obtain raw materials and necessary supplies as they struggled in the face of unforeseen disruptions. While many somehow managed to navigate this testing phase, their challenges are by no means over.

In fact, they continue to stock more inventory than usual amid a volatile business environment. As suppliers you could bank on for decades become less reliable, businesses aren’t even sure how much inventory is sufficient.

Clearly, the events of recent times have changed the way businesses approach risk management. From diversifying their supplier base, maintaining just-in-case inventory and preparing for supply chain disruptions, the challenges in the so-called new normal are multifold. Add to this geopolitical unrest, inflation, rising energy and input costs and extreme weather events.

Not surprisingly, the biggest priority for businesses today is to find a way to ensure continuity of supply. This is vital not only to keep operations running but also to safeguard against potential disruptions and build a resilient supply chain.

So, what are businesses doing to ensure supply continuity?

They are rapidly diversifying their supply chains.

Why Supply Chain Diversification Matters More Than Ever

Resiliency has become the new business buzzword. A resilient business can continue its operations seamlessly without getting impacted by disruptions and other external disturbances.

The popular opinion today is that supply chain diversification is key to building resiliency. By diversifying their supply chains and supplier base, businesses can spread their risk and mitigate the impact of social, political and geographic incidents on raw material price and availability.

As part of the diversification initiative, they are revisiting their sourcing strategies and employing a country plus-one strategy.

In other words, to reduce their dependency on a single supplier, country or region for essential supplies, they are identifying a backup or secondary supplier in a different region. In case there is a supply disruption in one region and the primary supplier cannot deliver, the secondary supplier can scale up production at short notice.

Over time, the secondary supplier may be more actively engaged and become more dominant than the primary supplier, says Carlos Mena, Nike professor of supply chain management at Portland State University’s School of Business in this white paper by Procurement Leaders and GEP. In the apparel industry, for example, the business is shifting from China to countries such as Vietnam, Pakistan and Thailand, says Mena.

Similar is the case with the semiconductor supply chain.

With prolonged semiconductor shortages affecting multiple industries, businesses have had to find alternative sources of supply and move away from suppliers in Asian countries such as Taiwan, Japan and Malaysia. While some automakers responded by announcing plans to manufacture their own semiconductors, others split up purchasing volumes to navigate the crisis.

Alternative sourcing strategies such as reshoring and nearshoring have also become vital in the resiliency plan. Not only can these strategies offer more flexibility and accelerate supply, but they can also provide the necessary shield against many forms of supplier risk.

Another aspect of supply chain diversification is to identify and partner with small and medium-sized enterprises that can offer local advantage, shorter lead times and more innovative solutions.

Diversification is More Than Just Finding New Suppliers

Along with diversifying the supplier base, supply chain diversification also means building new capabilities to adapt to the changing conditions. The objective of diversifying is not merely to subside risks but also to find new ways to gain competitive advantage.

Greater choice within the supply chain enables a business to look at costs, performance, location as well as a variety of goods. It therefore provides an opportunity to analyze several metrics to arrive at a choice that makes the most business sense. For example, a business may shortlist a supplier that offers environmentally friendly products and scores high on sustainability. This can help the business retain existing customers, attract new customers and gain an edge over competition.

The Bottom Line

Companies that build resiliency in their supply chains can thrive in a fast-changing business environment. This requires businesses to diversify their supply chains, foresee potential risks and act proactively to mitigate their impact. It also requires businesses to have end-to-end supply chain visibility and real-time data accessibility.