Supply Chain Diversification: Walking the Tight Rope

Supply chain efficiency is an intricate part of almost every business. You have probably seen or heard of a company that ran into financial problems due to supply chain disruptions. Or maybe your business has experienced these issues yourself. Whether you are facings those problems right now or researching to create a plan of prevention, it is important to exercise judicial prudence in the examination of this issue. You cannot blindly start beating the drum of diversification without careful consideration.

For some companies it is not unusual to find that 75% or more of their supplies come from a single supplier. For many, this is due to low volume orders that don’t provide room to order from multiple suppliers. Others have a highly specialized item and with very few vendors to select from, they have made the choice to align themselves closely with a single supplier to provide the most optimal sourcing and pricing for what they need.

There are a myriad of issues facing every supply chain. We’ve touched on natural disasters in the past, but there are other issues in this global economy that can come to bare. Water and land infrastructure, political climates and turmoil, natural resource accessibility, and the financial health of the companies providing you with what you need.

On the surface, it appears that diversity in your supply chain would be a desirable objective to achieve.  And it is, but you have weight the costs and various considerations before moving forward.

• Do you have sufficient inventory to handle extended supply disruptions?
• Do you have enough volume to divide between 2 or more suppliers?
• How will you manage your relationship to existing supplier(s) during the transition into multiple suppliers?
• Are there new supplier implementation costs and can you afford them?

When looking at implementing your plan of diversification it’s important to also note that diversification does not mean overproduction. If you don’t have sufficient volume to work with multiple suppliers, ordering excess inventory under the guise of diversifying is a waste of time and money.

Look for opportunities to diversify, run a thorough cost analysis, and proceed with caution.