Diversification in the Supply Chain

As investors, we are taught early on that a diversified portfolio is a smart, lower-risk approach to managing finances, whether it be our personal investments or those of an organization. As Steven Banker appropriately asks in his article, https://logisticsviewpoints.com/2020/04/27/if-multi-sourcing-is-a-best-practice-why-are-so-few-companies-doing-it/, why aren’t more companies using diversification, or multi-sourcing, as a means to ensure supply continuity & stability, manage risk, account for geopolitical and environmental risks, foster innovation and manage total costs?

In this data set of over 600 companies, less than 1/3 of companies have developed an alternate source of supply for their Tier 1 suppliers. In our current environment which includes geopolitical strife, environmental risks (such as hurricanes), tariff’s and trade wars, and the current and future risks driven by a pandemic or global health issue, having “all of your eggs in one basket” is incredibly risky & unnecessary. Here are three areas to address as you look to diversify your supplier base:

  1. Strategic Supplier vs. Transactional
    • It’s no secret suppliers get motivated by volume, and can promise you short-term cost advantages. If you only think about short term costs, a transactional relationship is exactly what you’ll get. When it comes time to talk about innovation, investment sharing or contingency planning in the wake of constraints, expect no forward thinking, no solutions and no focus or ideation.
    • Change the thinking to create a strategic supplier partnership, which is a two-way street to mutual success.
      • Seek out a supplier that has invested in technology & is able to share robust data and analytics about how they can help you become more efficient.
      • Talk openly (under a CDA, of course) about your key metrics & measurements, your regions & channels of growth and your differentiation focus areas. Can your strategic supplier support and enable this growth?
      • If you are buying a finished good from your supplier, understand from where they source their components, and where they complete final assembly? Talk about the risk areas together and what will be done to diversify, including shared investment in capital.
      • If you are buying components for your manufactured finished goods, ensure the supplier has a minimum of an 80/20 diversification (that is, at least 20% of component supply from a different location) with the capability to quickly ramp up to 50% in an agreed-to, fixed period of time.
    • Bottom line: When a constraint occurs, which relationship do you think will garner the most attention and problem-solving focus?
  2. Continuity over Cost
    • If your number one question is “what’s the price”, stop, regroup and review your strategic intent. A supplier or sub-supplier is going to be reticent to offer you cost concessions if they know you are only looking for a transactional relationship, and if they do offer a low price, it likely will not be sustainable as they will realize higher costs and look to pass those on to you. And the whole cycle begins again!
    • Think about today’s environment. If you have the choice to move your production to China to save 5%, vs. moving to Taiwan or Indonesia, knowing the geopolitical risks, the government intervention in communist China, the lack of I/P respect and protection and the likelihood of increased global pressure on trade, how likely are you to truly realize that cost advantage? How likely are you to realize continuity risks?
    • Instead, prioritize continuity over cost, which has you and your suppliers map out the ENTIRE supply chain, designing contingencies, pathways to innovate, cost savings that can be shared, and mitigation plans under extreme conditions. This takes an integrated, highly communicative approach.
  3. Transparency
    • Proven forward-thinking results, problem solving leadership and data/analytics are critical when partnering with strategic suppliers. But it takes a building of trust.
      • Think about you asking your tier 1 supplier who their sub-suppliers are…what do you think they are going to fear? That you will go around them and cut them out. So, when you design the entire supply chain, address this upfront and give confidence that your intent & plan is not to do so.
      • Be honest. In my 20 years of commercial business with Wal*Mart, they have always been open about their unlikely scenario to throw all their business to one supplier. They simply cannot risk all with one supplier no matter how much they love the product line or the management. Having that same conversation with your suppliers is not only fair, but appropriate. Help them understand how much of their business they CAN secure, and then work on a plan to achieve.
      • Go back and review your own company’s cultural values and code of conduct rules, and ask yourself whether doing business in a certain country or with a certain supplier is in alignment with those foundational components?
      • Your suppliers need to provide you dependable, timely inputs. From raw material market cost fluctuations, to local labor supply/demand trends, to opportunities for improved strategic sourcing, to competitive intelligence, a strategic supplier is truly a partner and can be a catalyst to help you achieve your strategic goals.