What is supply chain diversification?

At its simplest, supply chain diversification is about expanding the choices businesses have in procurement  from a larger circle of manufacturers, from diverse locations.

The reason diversification is important is because it provides buyers with an abundance and flexibility of suppliers to choose from. This expanded choice provides buyers resilience in their supply chains and helps to build a stronger business foundation. 

How to Diversify

Although supply chain diversification has always been of value for business stability and growth, it is taking on a special significance in the post-COVID world. This is because the coronavirus crisis has laid bare the vulnerabilities of modern supply chains with its reliance on lean manufacturing principles and an overreliance on China in key areas of manufacturing. Production outages in China impacted several industries—including automotive, electronics, pharmaceuticals, and consumer goods—across the world. 

Businesses who want to stay on top of their game will have to pivot towards a different approach in procurement by seeding supply chain diversification into the DNA of their operations. They can do this by:

  • Moving from large to medium/small sized suppliers: Historically, businesses have preferred to choose large multinational partners as their suppliers. Such manufacturers promise reliability through their worldwide reach, and some legal advantages including minimum likelihood of closure. However, shifting sourcing to SMEs can offer other benefits. Primary among them being the flexibility and greater value for money due to lower administrative and management costs and greater innovativeness 
  • Diversifying across a range of economies: In the context of the US-China trade wars, and the greater readiness buyers feel in considering alternatives to China in a post-COVID world, businesses should consider shifting their sourcing to a wide range of economies. This includes India which a recent World Bank report ranks among the ten most improved economies ‘on the ease of doing business’ in the world. It also includes economies in East Asia such as Indonesia, Vietnam and the Philippines that have undergone extensive economic transformations and offer room for new opportunities
  • Fostering capacity building for new sourcing  alternatives: However, shifting sourcing to alternative economies needs to be gradual and followed by required investments. To smoothen the transition, donor countries and businesses can consider working with new host countries/suppliers to help redesign their development priorities with the aim of building their production capacities; improving fiscal policy; and strengthening the rule of law to simplify legal codes around land acquisition, tax codes, labor rights and bankruptcy policies etc.

Digitization May Help Accelerate Supply Chain Diversification Process  

Supply chain diversification is a must. However, shifting sourcing isn’t that easy, as there is always a possibility of new risks emerging for your business as you onboard a new supplier, someone you have never worked with previously. 

Digital solutions make it easier to onboard a supplier and train them to promote quality and social & environmental compliance measures. By implementing standardized workflows and checklists for audits & inspections, businesses can create a healthy relationship with their suppliers and incorporate best practices in their supply chain processes. Digital platforms also help businesses in being more data-forward and proactive in implementing measures using real-time communications and risk analysis.  

Read Here: How you can manage your supply chain risk

Businesses across verticals are aware of the need to diversify their supply chains beyond the markets and economies they have traditionally relied on. Although transiting from the ecosystem they have customarily been used to is going to be hard in the short-run, the long term benefits are clear and many. 

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