There are many moving parts in every supply chain. If even one of those touchpoints is compromised, it can affect the entire process.
Thankfully, there are strategies you can employ to help strengthen these connections. A supplier diversification strategy is one of them. This strategy involves creating a network of additional suppliers that encompass different sizes, locations, and capabilities.
In my view, diversification is about engaging additional supply partners that augment what your company buys. It’s not simply about engaging competing suppliers to bail you out in the event of a supply chain disruption.
Today, I’m sharing the importance of creating a supplier diversification strategy, as well as the pros and cons you need to know before getting started.
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Supplier Diversification Success Story
In my recent history, I led a change initiative focused on adding an additional supplier for a particular product line. At the time, all our suppliers for this product were offshore suppliers.
By moving 10% of the spend to a domestic supplier we were able to reduce lead time from four months to two weeks.
Why Create a Supplier Diversification Strategy?
Think about your financial portfolio. A knowledgeable advisor would recommend diversifying your investments rather than putting all your money in one spot. Doing so helps hedge your account against risk.
The same basic principle applies to your supply chain. There are many supplier issues that can occur at any point, and any of them could negatively impact your operations. These could range from natural disasters to material shortages.
When issues occur, you need to be able to quickly recover. With a supplier diversification strategy, you can lean on an already existing relationship to increase the supply from a smaller supply partner, while your primary one is momentarily inoperable.
Beyond offsetting risk, let’s look at a few more reasons why it’s smart to diversify.
1. Encourage Innovative Solutions
Supplier relationships aren’t one-sided. Rather, they’re partnerships that foster innovation. When you bring more people into the mix, that innovation likewise expands.
With a diversified supplier strategy, you can think outside of the box and learn from the opinions and perspectives of many different companies and business leaders. This is a great way to expand your viewpoint and encourage continuous improvement within your own workforce.
2. Personalize the Customer Experience
Your customers also benefit when you diversify your supplier portfolio. This is especially the case when it comes to your geographical reach. When you team with suppliers across the country or even across the world, you can cater to localized customers on a more personal level.
You may even be able to offer localized discounts and competitive local pricing, which increases brand visibility and loyalty.
3. Smoother Deliveries
If an upset occurs in your supply chain’s delivery stage, it can affect several critical parties, including your customers.
When you have additional suppliers on backup, you can engage with them to fill shortages and make up for any losses – before the customer is affected.
4. Navigate Sales Increases
The data analytics capabilities of modern ERP and SCM systems have made it easier than ever before to forecast and predict future sales numbers.
Yet, an event can still occur that causes these numbers to surge past your expectations. If this happens and you only have one or two suppliers to call upon, you could be forced to put inventory on back order until you can produce enough to meet the demand.
However, with a more diverse supplier network, you can more easily support these upticks.
5. Foster Healthy Competition
Another reason to prioritize supplier diversity? When you have more than one company seeking to do the same job, they’ll naturally want to be better at it than their competitors.
While you don’t want to incite any type of rivalry, knowing that you have other options can motivate each supplier to perform their best work, which increases quality levels on your end.
6. Survive Changes in Commodity Pricing
Commodity prices are largely set by supply and demand. As such, they can be volatile and quick to change. If you’re unprepared for these fluctuations, it can put a great deal of strain on your supply chain.
However, when you create a strategy to diversify your suppliers, you can mitigate these risks.
3 Challenges of Supplier Diversification
Successfully ordering inventory is about more than issuing a purchase order and waiting for the delivery date. It involves communicating expectations and capabilities from both sides and ensuring commercial terms are met by both parties.
While a supplier diversification strategy is predominantly a good thing, it isn’t without its risks. Let’s review three of the most common pain points to watch out for.
1. Increased Costs
When the market is spread more thinly across different suppliers, those companies could increase their prices in response.
Not only will those increases affect your own operations, but they could also translate into higher prices for your customers.
Strong supplier communications are key to successful partnerships and can help you stay ahead of price increases so you can plan for them.
2. Domestic vs. Global Producers
As mentioned, diversification can mean reaching out to both domestic and global producers to widen your reach and stay responsive to customer demands. While this can help you widen your brand presence, it’s important to realize that it could also result in price increases.
For instance, you may find that domestic suppliers charge more than global ones, primarily because they can offer shorter lead times and more flexible, personalized service.
3. Increased Workloads
Finally, consider the impact that this change will have on your workforce.
As you add more suppliers to the fold, your employees will be the ones managing and nurturing those relationships. This can be time-consuming and pull them away from their day-to-day work.
As such, I recommend trying to launch any new strategies during historically slow seasons at your company. At the same time, make sure all employees understand your expectations by employing organizational change management best practices.
Diversify Your Suppliers & Optimize Your Supply Chain
If you’re putting all your eggs in one basket, it’s time to think about expanding and diversifying your supplier network. This can help fortify your operations against setbacks that threaten to derail your supply chain management processes.
Essentially, a supplier diversification strategy serves as a form of insurance for your supply chain. It ensures that if one domino becomes unstable, the entire lineup doesn’t fall.
Our ERP consulting firm can help you rethink your supply chain before you implement new enterprise software. Request a free consultation below to learn more.