5 reasons to implement supply chain diversification

Companies are fast becoming accustomed to factoring in unexpected changes when going about their supply chain planning. With today’s fast-changing world and disruptive environment, companies are eager to find ways to sure up their supply chains so their customers can continue to access their products.

One of the ways companies can do this is through supply chain diversification. In the Beyond the Box podcast’s latest episode, experts reflect on trends in globalisation and regionalisation, and how companies can diversify their supply chains to bring more agility to their business.

What is supply chain diversification?

Supply chain diversification is a strategy employed by companies to ensure more resilience and agility in their business. The strategy involves switching from relying on a single supplier or location, to working with multiple suppliers for supplies, production and/or services, in multiple locations.

Overall, supply chain diversification helps companies weather disruptions. This is in part by reducing risks. It also has the potential for cost savings, innovation, improved sustainability, and greater agility.

Benefits of supply chain diversification

1. Risk reduction

   The COVID-19 pandemic, alongside its long-stretching impacts, highlighted the hidden vulnerability of supply chains that relied either on very few suppliers, or on planned production in one location only. As the pandemic continued, it became apparent that companies with a more diversified approach to their logistics and business were best equipped to handle the associated disruptions and challenges the pandemic brought to businesses. A prime example of how very few producers can impact a supply chain is the chip industry. During the pandemic and in the time afterwards, the world grappled with microchip supply issues.

   While the pandemic is no longer an active issue for many companies, today’s geopolitical and environmental climate means that companies still stand to win with supply chain diversification.

   By diversifying suppliers and production places and not relying on one supplier or region, companies can avoid large-scale impacts and disruptions, if something should occur, like a natural disaster or political uprising.

2. Building resilience

   Don’t put all your eggs in one basket – this is true too of the supply chain. By diversifying, the supply chain becomes more resilient. It can better handle and adapt to unexpected changes, helping businesses continue their operations smoothly.

   Sourcing through multiple suppliers, be it for multiple part or one component or item, can greatly diminish supply issues. If one supplier is unable to fulfil the business needs of the company, another supplier can step in to fill it.

   In addition, companies using multiple locations for production, warehousing, and sales can avoid headaches related to cross-continental movements. Getting supplies from one region to another is no longer needed, as production and sales are in the same region. Should one region experience issues in handling production, another region can produce for the impacted region.

   Additionally, partnering with a logistics provider that can provide services through different transportation options, different shipping methods and routes, can help minimise the impacts of disruptions to the supply chain.

3. Encouraging innovation

   The 2020s are on track to being a highly digitalised decade, with new technology and innovative solutions seemingly to pop up daily. By diversifying, companies can work with suppliers that have access to different technologies and innovations that can improve product quality, processes, and production speeds. This variety of inputs helps businesses stay competitive in a rapidly changing market environment. A prime example of this can be seen in the fashion industry, where lifestyle companies have been able to use new technologies to cut down waste and energy usage.

4. Ensuring compliance and sustainability

   Another key trend of the 2020’s is an uptick in regulations, especially within the field of customs. As the world takes steps to tackle environmental issues and climate change, companies may be feeling challenged by the need to navigate a growing number of trade rules and customs regulations.

   Im most cases, these rules and regulations are intended to help foster transparency. For example, the regulations to enhance environmental, social, and corporation governance in the EU. These have been carefully designed to avoid creating further complexity and placing disproportional compliance burdens on businesses. However, in some cases, rules and regulations can become trade barriers. These can affect how businesses work across borders, “requiring them to rethink their processes and approaches to customs to ensure compliance, mitigate risks, and even improve their competitiveness.”

   By seeking opportunities closer to home, companies can ensure that they are able to maintain and follow the rules and regulations of that region – reducing the complexity of working across the world with a vast number of different jurisdictions. Additionally, a diversified supply chain allows companies to choose suppliers that meet their environmental and ethical standards.

5. Managing cost whilst increasing flexibility and scalability

   Diversified supply chains can be more flexible and agile than non-diversified ones. They are better situated to respond to market demands, scaling up or down, as needed. Companies can quickly adjust their operations in response to market fluctuations, without being constrained by a supplier’s capacity or a location’s reachability, such as port closures due to outbreaks during the pandemic. Whilst this flexibility is useful to all types of industries, it is especially crucial for industries that face seasonal demand or fluctuating consumer preferences.

   Additionally, diversifying supply chains can help companies manage costs more effectively. Having multiple suppliers can lead to better pricing through competition and visbility.

Getting ahead with supply chain diversification strategy

After years of disruption and challenges, companies now consider resilience as one of their top priorities. Companies are finding that they need to redesign their supply chains, diversifying where possible. Through this, companies take a strategic step towards infusing their supply chains with resilience.

With diversification, companies can reduce risks, manage costs, foster innovation, ensure compliance, and increase flexibility, alongside enhancing resilience. This strategy helps companies become better placed to navigate uncertainties, seize opportunities, and achieve sustainable growth in an ever-changing global market.

There is much evidence that supports that supply chain diversification is winning ground. With geopolitics becoming more volatile, many companies have already begun to look at regionalisation as an option for their business models. As the world grapples with more regulations and laws regarding ESG, alongside continuing political and climate challenges, companies are looking for ways to safeguard their businesses. While the future cannot be foretold, supply chain diversification strategy and a regional approach may be the most resilient option for companies to utilise.