How diversification helps de-risk supply chains

24 May 2023 9 min. read
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Western businesses re-focusing supply chains to low-cost economies including China has become increasingly risky since the turn of the century. Andrew Black, Director at Efficio, explains why supply chain diversification is now a business imperative.

Supply chains across the globe have faced unimagined disruption over recent years. From the ongoing ramifications of the pandemic, which caused severe delays to production and shipping, to the war in Ukraine, organisations across a multitude of industries have been plunged into uncertain and choppy waters.

The knock-on effect of such events has exposed the fragility of current supply chains, forcing business leaders to analyse existing ways of working. Spiralling inflation and interest rates have only added to this, emphasising the need to develop more robust supply chains that can flex and absorb the impact of future turbulence.

Andrew Black, Director, Efficio

For decades, global businesses viewed outsourcing production to low-cost countries as a key route to lowering overall cost – but this has proven to be an outdated and often risky strategy. China, for example, was seen as the leader of these low-cost, high-capability jurisdictions.

However, amid rising tensions between China and the West, increasing costs within China, and a growing realisation that long, complex, and lean supply chains are susceptible to shocks, many companies are realising that this strategy has a cost of its own. Concerns like these are already fundamentally changing the supply chain landscape.

Following a major push by the Trump and Biden administrations, as of 2022, the US is now regularly importing more goods from Europe than from China – a major shift from the 2010s.

Many of the changes we are witnessing represent the beginnings of longer-term structural shifts. With many companies now diversifying their supply base, businesses can minimise shortages and distribution disruption, restore continuity, and bolster resilience. In fact, 7.5% of UK businesses had already made huge, transformative changes to their supply chains within 12 months of the end of the Brexit transition period, the main ones being supplier diversification and nearshoring.

As the world continues to weather the turbulence of conflict and inflation – and with the impact of the pandemic still being felt and climate change a serious threat on the horizon – there is no better time to re-evaluate your business’s supply chain and implement a more resilient programme with strategies to weather future disruptions and be more sustainable.

What’s holding businesses back?

While diversifying your business’s supply chain improves your position when it comes to responding to geopolitical events, natural disasters, and inflation, there are several challenges to consider along the way.

Although a diverse supply is less vulnerable to external shocks, there are considerable logistical hurdles to jump when it comes to maintaining a complex, diverse supply chain. Multiple suppliers in different countries require considerable management time and effort. Embarking on a strategy of a diverse supply chain cannot be done half-heartedly – to be an effective hedge, each supplier relationship must be actively managed and well maintained.

Another issue that holds businesses back is the complexity of identifying suppliers that meet their procurement criteria. A successfully diverse supply chain programme must offer the right level of quality, cost, risk, capacity, and reliability – while sharing your values and goals. A further obstacle can be a lack of data and insights into your suppliers. Without this, gaining an understanding of new potential suppliers, building relationships, and growing your business network of diverse supply partners can be difficult.

These challenges, however, are ones that businesses seem set on overcoming. According to a recent report from Make UK, over 80% of the UK manufacturing industry has diversified their supply chains and almost a third of companies have increased the number of suppliers. Amid a world of uncertainty, and rising consumer expectations, companies must place supply chain diversification programs at the forefront to manage future disruptions, such as geopolitical events, natural disasters, and labour disruptions.

According to Efficio’s recent ‘Bridging the Gap’ research report, environmental sustainability is the second most important strategic initiative in which businesses are investing – 47%. So, while many businesses investigate their options and possibilities of diversifying their suppliers to better prepare themselves for future disruptions, it is important to consider the environmental consequences. Transporting materials – whether by sea, land, or air – contributes to global greenhouse gas emissions and impacts worldwide ecosystems.

Over-diversification can increase the environmental impact, however, sourcing from suppliers closer to home may reduce the transportation miles and impact on the environment. The environmental impact of supply chains is extremely complex and requires careful consideration. Exploring new, local, diverse supply partners can help meet on-demand requirements as external factors continue to put pressure on global supply chains.

When done well, investment in a diverse supply base can contribute to improving and building resilience, better environmental, social and governance (ESG) outcomes, and more cost-effective and innovative approaches.

Countless opportunities

Large suppliers often benefit from greater worldwide reach, more robust infrastructures and reporting, and more experience in the market. As businesses diversify their supply chains, they often need to consider extending their supplier base to small- and medium-sized enterprises (SMEs). This can bring some real benefits alongside the obvious challenges.

SMEs can often provide more innovative services and efficiencies as they look to stand out from their competitors. They may be willing to work with you to come up with bespoke solutions to your needs.

Many business leaders note that ongoing geopolitical issues are the main factor for continued supply chain issues, with others citing the lack of raw materials and high levels of inflation as contributing to the problem. Investing in, and utilising multiple suppliers – including those from traditional low-cost countries and those more locally, from large, established businesses and smaller more innovative ones – will mitigate these risks.

It will also create opportunities to analyse cost, location, and range of availability among suppliers and can encourage competition between suppliers to drive prices down. Businesses that prioritise supplier diversity have been found to spend 20% less on their buying operations.

While the benefits of diversifying your supplier base are becoming increasingly evident, this strategy goes against the grain of what so-called “normal” procurement looks like. Buyers have traditionally focussed on consolidating spend, so the idea of splitting spend between external suppliers (therefore adding more complexity), can feel counterintuitive.

However, with current supply chain issues only set to continue, supplier diversification is something all businesses need to consider. Diversification can provide businesses with a supply chain more able to absorb external shocks, by mitigating vulnerability to the shortages and obstacles that have plagued every industry over the last few years.

Today, it is more important than ever to create an agile supply chain that can weather economic pressures and disruptions. Agility equates to resilience in today’s turbulent business landscape, and resilience will be the key to not only survival but long-term success.