Supply Chain Diversification: What Is It and Why Is It Important?
Diversifying the supply chain entails making changes to governance and management practices to broaden supply and transportation options. For example, when a logistics company only has a single route or depends on a single supplier, it has no backup option if the route becomes congested or the supplier is running low on stock.
Branching out to more suppliers and routes provides additional options during changing circumstances, allowing the company to adapt with minimal delays. Thus, diversification reduces risk and increases resilience by providing diverse options for responding to disruptions such as natural disasters, changes in trade regulations and policies, and other market fluctuations.
COVID-19’s Impact on Diversification
COVID-19 has served as a stark wake-up call for the global trade industry, emphasizing that health disasters can enormously impact everything from labor and manufacturing to supply routes and customer demand. Lockdowns to slow the spread of the virus, worker illness and death from infections, and soaring demand from consumers trapped in quarantine were just a few of the factors that sent the supply chain spinning.
The effects of the pandemic magnified existing weak points in the chain, such as a dependency on China for manufactured goods—but it was too late to adapt. As many logistics companies were ill-prepared to manage the pandemic’s impacts, the system as a whole struggled and experienced a domino effect of problems such as skyrocketing freight rates, mismatched supply and demand, labor shortages, and backlogged ports. Many of these issues continue to this day and now, companies across the globe are realizing they need to make significant changes to prevent a repeat catastrophe down the road.
Best Practices for a More Diverse Supply Chain
Diversification should start by conducting analyses to identify the various risk scenarios that might affect the given supply chain and how to adapt to each. Then, look at how the existing chain would fail to adapt and enhance those points of failure by adding branching options or adjusting agreements and contracts.
Because the market and its externalities are in a constant flux, risk analyses should recur periodically to identify new weaknesses and risks that threaten both the individual company and the overall global supply chain. Create organized budgets, plans, tools, exercises, and reports to track progress and new challenges over time, ensuring ongoing vigilance even in times of good fortune and apparent low risk. It’s easiest to start this process at the inception of a network or contract but adding diversity to existing systems will still be more efficient and cost-saving in the long term than enduring shocks without any resilience mechanisms in place.
Diversifying an existing supply chain is a messy and complicated task that is very hard to do on your own but having a trusted and reliable logistics partner can make things much easier. From working with new suppliers to managing new trade routes, a logistics partner like ClearFreight can help make diversifying your supply chain much easier and less stressful. Contact our team today to learn how our decades of expertise and customized supply chain solutions can help make logistics easier for you.