Benefits & Challenges of Supply Chain Diversification

Why is it important?

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 provides shorter shipping times due to closer proximity between the manufacturer and the delivery destination.

Duty Advantages

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

Challenges of Supply Chain Diversification

Over-diversification

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. Over-diversification 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 over-diversification 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, and production capacity all important factors to consider. Cultural and language differences further increase risk due to a greater possibility of 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 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.