Resilience through diversification: Why supply chain diversification is now a business imperative

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In recent years, supply chains have faced disruptions in a multitude of new, often unforeseen, fronts. The pandemic, the war in Ukraine, and increasing geopolitical tensions have exposed weaknesses in many supply chains. Inflation and rising interest rates have also put pressure on business leaders to develop more robust supply chains able to flex and absorb this new generation of shocks.

Since the 1990s, businesses around the world have focussed on lowering costs by outsourcing production to low-cost countries. This is now looking like a risky strategy. China was seen as the leader of these low-cost, high-capability jurisdictions. This was encouraged by the Chinese government and facilitated by a stable political landscape, low labour costs, and pro-Chinese Western governments. 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 – the biggest in recent years being the COVID pandemic – many companies are realising that this strategy has a cost of its own and may now be played out.

These concerns are already fundamentally changing the supply chain landscape. In a dramatic change and 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.

The challenges businesses face

Diversifying the supplier base can provide businesses with a supply chain more able to absorb external shocks when needed. Today, it is more important than ever to create an agile supply chain that can weather economic pressures and disruptions. Companies are now ensuring that at least some of the supplier base is closer to home in an attempt to produce more shock-proof supply chains.

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.

Although a diverse supply is less vulnerable to external shocks, there are considerable logistical challenges in 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.

A further challenge 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.

Finally, the complexity of identifying suppliers that meet your procurement criteria can be a significant challenge. A successful supply chain diversification programme must offer the right level of quality, cost, risk, capacity, and reliability – all whilst sharing your values and goals.

These challenges 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.

The sustainable impact

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.

Increasing competition and profits for suppliers

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). However, 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.

Creating a resilient supply chain

It can be argued that supply chain diversification is in some ways at odds with the so-called “normal” procurement mantra of consolidating spend. Splitting spend between external suppliers introduces more complexity into the supply chain, which buyers traditionally opt to avoid.

However, given that one in three senior business decision-makers expect current supply chain issues to continue causing disruptions for businesses well into 2023, supplier diversification is something all businesses should consider. It helps mitigate vulnerability to the shortages and obstacles that have plagued every industry over the last few years. Investing in a diverse supply chain introduces more resilience into businesses at a time when external shocks continue to cause disruption and create opportunities for businesses to invest in a more sustainable – and ultimately cost-effective – approach.