How Supplier Diversification Can Help You Combat Recent Manufacturing Supply Chain Disruptions
Supply chain disruption is inevitable. Recent global manufacturing supply chain disruptions (which, though tapering off, are still ongoing in many respects) were a testament to this business reality. Since you cannot completely prevent disruption, your next best bet is to set up mechanisms beforehand that surmount the challenge when it occurs. There are dozens of mitigating controls manufacturers could tap into but few are as significant as supplier diversification.
Supplier diversification could take multiple forms:
- Working with a single supplier but having one or more backup suppliers as a contingency. You order from backup suppliers only when you have a problem with the sole supplier.
- Splitting your sourcing across multiple suppliers. You regularly order from each one. That way, each supplier serves as a hot or live backup.
- Spreading suppliers across geographies, including shifting some sourcing nearer shore.
Note that these are not necessarily mutually exclusive. For example, you can have multiple suppliers spread in different offshore locations or have all of them near shore.
How does diversification help you combat disruption?
1. No single point of failure
Recent supply chain disruptions starkly demonstrated the grave danger of relying on a single supplier. For example, semiconductor shortages had a cascading effect that held back motor vehicle production across the world. If you source more critical raw materials or components from one supplier, any delay or disruption they experience impacts your entire production line.
Multiple suppliers mean you can immediately spread out the slack when one supplier is entangled in a sudden crisis. You maintain relative normalcy making the disruption and back-end reorganization invisible to your customers.
2. Gain from multiple concurrent long-term relationships
Starting with a new supplier means that, in the beginning, they may treat you as a temporary one-off customer. It will be months before they view you as a long-term partner. Though good suppliers always want to make a strong first impression, they may not have the capacity to offer the same depth of service as for their more established buyers.
Working with a supplier for a considerable period comes with vital perks that make a difference during disruption. When you spread your sourcing to multiple suppliers, you gain from relationship longevity in case you have to shift more of your business to them. No starting from scratch and spending months nurturing the relationship.
3. Drives up efficiency and innovation
When multiple suppliers are fighting for your business, they cannot afford to settle into a comfort zone. At the back of their minds, there is always a thought about a supplier out there who is ready to take a bigger share of the pie. In a survey, 3 in 4 respondents stated long-term business relationships spurred efficiency and 3 in 5 indicated it improved innovation.
As suppliers battle for the contract, you inevitably experience an improvement in supply chain efficiency. As they strive to stay agile, your inputs are higher quality and get to your factory quicker. You may even discover that different suppliers have certain strengths you could tap into. For example, you may find a supplier that is best suited to supply a particular production location.
4. Reduced costs and better terms
Like the efficiency gains, the competition spurred by supplier diversification increases your price negotiation power. It is in contrast to single sourcing — where the balance of pricing power is often with the supplier. They know how difficult it will be for you to break the relationship and move on in short notice.
Supplier diversification drives down sourcing costs and freight rates. It is a race to the bottom between your suppliers, but one that can only be beneficial for your profitability. Also, the supplier knows you have their competitor on call and ready to deliver — so the price drop is not likely to be accompanied by a deterioration in quality.
5. Knowledge growth
Dealing with one supplier has a sense of consistency, predictability, and straightforwardness. Over the long term though, engaging the same party year in, year out can inadvertently narrow your thinking. As far as you are concerned, they are the subject matter expert on the raw material or component they provide. Aside from tweaking specifications on what you want from time to time, you will probably not challenge some of their views.
On the other hand, when sourcing from multiple suppliers, you gain from a rich, diverse reservoir of knowledge. Think about how each meeting and conversation with a different supplier will be unique in its own way.
You glean insights you can bring up in conversation with other suppliers of the same product in order to maximize the value of the relationship. Additionally, you may even stumble on information that directly relates to your supply chain but can be applied to other facets of your business.
Your supply only can only be as strong as its weakest link. If you peg your fortunes on the stability of a single supplier, you are bound to rue it when disruption inevitably comes calling. Supplier diversification increases manufacturing supply chain resilience and efficiency while reducing risk and lowering costs. You are more likely to get the inputs you need to keep your operations running even in the face of severe disruption.
Alex Selwitz is the Director of SEO for Red Stag Fulfillment, an eCommerce fulfillment warehouse that was born out of eCommerce. He has years of experience in eCommerce and digital marketing. In his free time, Alex enjoys playing guitar and learning about new trends in the digital world.
A Game-Changing Energy Discovery