Benefits & Challenges of Supply Chain Diversification

  • 13th August, 2022

What is Supply Chain Diversification?

Supply chain diversification is the process by which companies spread their production across multiple suppliers in order to reduce the overreliance on any one supplier or region. Diversification typically occurs across multiple countries, mitigating the threat posed by regional issues. Diversified supplier networks can lead to reduced risk exposure for businesses, and an increased resilience to handle unexpected situations.

Why is it important?

The widespread disruption caused by the recent COVID-19 pandemic highlights the importance of consistent and reliable supply chains. A 2021 survey by Mckinsey found that 71% of Chief Procurement Officers plan to diversify their supply chains, citing a need for greater stability and flexibility amid volatile demand.

New, emerging trends and an evolving retail landscape is resulting in more businesses prioritizing diversification. According to a recent PwC report, insufficient diversification amongst suppliers is seen as a top risk for businesses in 2022, with 62% of respondents saying it is either moderate or high risk.

Benefits of Supply Chain Diversification

There are numerous benefits associated with supply chain diversification, ranging from reduced risk exposure and greater resilience, to duty advantages and radically shorter shipping times.

Greater Stability

Businesses benefit from greater stability due to a more diverse supplier network providing less concentrated exposure to any one supplier or region.

Faster Growth

A bigger supplier network increases the total network production capacity, helping businesses grow faster by leveraging a more scalable supply chain.

Wider Access

Building a global supply chain of suppliers across multiple countries provides greater access to new materials, machinery and labor.

De-Risking

Successful diversification results in de-risking for the business, reducing the overreliance on certain suppliers within their supply chain.

Shorter Lead Times

Onshoring or nearshoring provide shorter shipping times due to closer proximity between the manufacturer and the delivery destination.

Duty Advantages

Diversification can offer enormous duty advantages to businesses who manufacture in countries that fall under trade agreements, such as NAFTA, CAFTA and GSP.

Challenges of Supply Chain Diversification

Overdiversification

While adding suppliers to your network can provide many diversification benefits, businesses can make the mistake of adding too many suppliers too quickly. Doing so can result in a lack of transparency and greater management inefficiency. Overdiversification is especially risky for younger companies that do not have the operational bandwidth or resources required to adequately vet new suppliers or maintain quality standards for a growing network.

Complicated supply chains are more vulnerable. A reliance on multiple subcontractors who may face shortages of their own increases the risk of cascading supply chain failures. The rising importance of environmental, social, and governance (ESG) initiatives further highlights the risks of overdiversification as unethical behavior and practices within supply chains become increasingly more difficult to detect the larger a supplier network gets.

Market Knowledge & Access

Expanding into new markets can be time consuming and expensive, particularly for companies that do not have a presence on the ground. Extensive due diligence is required to ensure a specific market is suitable for your needs, with access to the right resources, labor, production capacity all important factors to consider. Cultural and language differences further increase risk due to a greater possibility for miscommunication between parties.

Reliability & Consistency

Companies with a good understanding of which markets they want to diversify into are still faced with an array of challenges. Finding and onboarding a reliable new supplier in another country can be tough. Many suppliers in the developing world are still without an online presence, meaning simply trying to track down the right person can be time consuming and unproductive.

When a relationship has been established with a new supplier, the risk shifts to the quality and consistency. A common mistake businesses make with new suppliers is “first order illusion”. Often too much weight is given to the ability of a supplier to deliver the first order at the right price. However, equal if not more attention should be placed on the long term ability of the supplier to produce the product reliably and consistently. The solution lies in establishing better relationships with your suppliers. This includes ensuring values and incentives are aligned as well as having transparency over the quality control processes and operating procedures in place.

Looking to diversify your supply chain?

Relloe specializes in helping brands expand their supplier network and diversify their supply chain to improve stability, reduce risk, and access new markets. Get in touch today and learn how Relloe can help you.

Author
  • Edward Routh

    Edward Routh
    Founder of Relloe

    " Supply chain diversification can play a big role in how well businesses are able to compete in an increasingly competitive and unpredictable marketplace. Whether they are looking for more competitive pricing, shorter lead times or a more stable supply chain, we help our clients expand into the right markets with the right suppliers for them. "