How To Build Resilience With A Diversified Supply Chain

A key aspect of a manager’s job is to manage risks but as we all know trying to predict and anticipate any and all risks is near impossible. The pandemic, the Ukraine War, and the myriad of geopolitical conflicts showcase the difficulties in anticipating risks and, at the same time, highlight the vulnerabilities of global supply chains. 

Therefore, while managing all risks is impossible, managing the risks and vulnerabilities with supply chains means one less headache and the best way to do this is by diversifying. Beyond serving as a means to mitigate risks, supply chain diversification can improve cost-saving, innovation, flexibility, capacity, and a company’s global reach.

Cost-Saving

Diversification is admittedly costly at first. The costs needed to carry out the search for new suppliers will initially add up. However, doing so allows you and your company a wider option of suppliers to choose from meaning you can properly determine which supplier suits you and your company’s budget and needs better.

Moreover, bringing on additional suppliers helps keep costs down by promoting greater competition between your suppliers. This itself is likely to benefit suppliers as well as it can help increase the demand for suppliers’ goods and services.  

In the long run, it can also help cut costs by limiting any supply chain disruptions and therefore any production disruptions, meaning it can reduce the likelihood of a mass supply chain disruption, writes the IMF. It is of course always better to prevent a problem than deal with a problem.

Innovation

Diversification can also boost innovation. In this sense, innovation has two meanings: product innovation and supply chain innovation. With regard to the former, companies can foster a culture of innovation by creating a competition of ideas between suppliers.

With regard to the latter, diversifying supply chains offers companies the opportunity to experiment with how they manage their supply chains. Past supply chain strategies have caused mass disruptions time and time again. Perhaps it is time for a change.

Harvard Business Review writes “As firms relocate parts of their supply chain, some might ask their suppliers to move with them, or they might bring some production back in-house. Either course—transplanting a production line or setting up a new one—is an opportunity to make major process improvements.”

Flexibility

Diversification’s impact on flexibility three-fold. First, diversifying and incorporating more suppliers allows companies a wide choice of qualified suppliers and thus the ability to take actions that are more to their interests. Second, to more effectively respond to fluctuating market conditions, the flexibility diversification affords allows companies to store and access extra capacity when needed. 

Limited diversification and thus limited capacity as means to save costs has been shown to be a flawed business model, reports the Guardian. Third, diversifying can have knock-on effects vis-a-vis flexibility throughout the world and enhance “substitutability.” The IMF wrote the following.

“Substitutability can be achieved in two ways: through greater flexibility in production, such as when electric vehicle maker Tesla Inc. rewrote software to enable its cars to use alternative semiconductors in response to the semiconductor shortage; or by standardizing inputs internationally. For example, General Motors Co. recently announced that it is working with semiconductor suppliers to reduce the number of unique chips that it uses by 95 percent, down to just three families of microcontrollers.”

Global Appeal

On the topic of the world and larger global impacts, diversifying supply chains can help acquaint companies with new markets. Companies have to first learn about the markets new suppliers originate from.

For example, before trying to sell into a new region some Japanese companies start by buying into this region to learn the culture and business practices. Diversification is important in this regard. It can be a gateway to new markets. 

After all, being acquainted with new markets of course implies future market access and therefore new opportunities. Opportunities can mean new customers, new partners, new strategies, and new environments.

Conclusion

Evidently, there are many great benefits to diversifying supply chains. From saving money, new innovations, greater flexibility and options, and expanding your company’s global reach. However, successful diversification requires time, planning, and a proper understanding of new markets you and your company want to diversify to.