The Role of Supply Chain Diversification in Building Resilience

Building the agile supply chain of the future

Supply chain diversification has moved to the forefront of a global conversation around building supply chain resilience in the wake of the pandemic. With the onset of the COVID-19 crisis, the world entered a tenuous period of global supply chain instability, starkly highlighting an urgent need to build a more agile, resilient supply chain to mitigate risk.?

Since then, geopolitical instability, increased levels of protectionism, natural disasters and an overreliance on China have meant that the supply chain has yet to bounce back to pre-pandemic levels of stability – a fact of which industry leaders are keenly aware. According to KPMG , 59% of CEOs cite ensuring a resilient supply chain as a top priority, with 89% believing protecting their supply chain is more important than shoring up cybersecurity defenses.

One key strategy toward achieving this is supply chain diversification, and as a result, it’s become a major trend in the freight and logistics industry.

Supply chain resilience starts with diversification

Diversification is intended to build greater redundancy, flexibility and agility to help supply chains weather unpredictable external shocks without too much disruption. There are a number of ways to go about this, including increasing the number of suppliers, setting up multimodal and redundant logistics solutions, and near- or re-shoring operations to bring them closer to home.?

Efforts toward diversification are already well underway –?according to one Ernst & Young survey , 62% of industrial companies have made significant changes to their supplier base over the last two years, 57% have established operations in one or more new countries, and 53% have near- or re-shored operations.?

Supply chain resiliency is such a top priority that these businesses have taken these measures despite most believing they will lead to increased costs in the short- and long term.

By spreading risk across multiple suppliers, regions and sources, companies are able to be much more responsive to unexpected events and disruptions, building a robust supply chain that can withstand a variety of logistical pressures. But what does this actually look like?

What does supply chain diversification look like?

Diversification can take a number of forms. The first is the addition of multiple suppliers to a particular supply chain. Multisourcing by adding domestic or regional suppliers to augment service to a single supply chain mitigates the risk of a supply chain disruption leaving your business with orders unfilled.?

Multishoring takes this principle further, by splitting risk over larger geographical areas. As China shut down during the pandemic, for example, the global economy was confronted with the consequences of what many describe as an overreliance on the manufacturing giant.?

To combat this, many organizations have since adopted a “China plus one” sourcing strategy, helping mitigate the risk of disruptions to the Chinese manufacturing source having major knock-on effects.

Diversifying carriers and freight lanes is another important aspect of building supply chain resilience. De-risking routes can be achieved by partnering with more than one same-mode carrier and greater adoption of multimodal freight solutions.

The challenges of supply chain diversification

While the net-positive effects of supply chain diversification are clear, it’s not without its risks and challenges.?

As supply chains become more dispersed and diverse, they also increase in complexity, and this opens up the possibility for more errors and delays as the network becomes more difficult to manage.

More suppliers also mean an increased level of ESG risk, which, beyond the ethical concerns involved, can have major implications for potential reputational damage, regulatory non-compliance and other legal and PR woes. To avoid this, suppliers need to be carefully vetted and monitored –?a complex and time-consuming process.?

And while re-shoring and near-shoring may appear to be attractive diversification options, the capital requirements for setting up new operations closer to home may be prohibitive for many manufacturing businesses, particularly small- to medium-sized entities.

Despite these challenges, building the robust, agile and resilient supply chains of the future remains a worthwhile investment in the long term. But executing a reinvention of supply chain architecture which has been in use for over half a decade is going to require a level of visibility seldom achieved in the freight and logistics life cycle. The solution??– a more strategic approach to data management

Good data management: the key to successful supply chain diversification

No matter which supply chain diversification approach you take, mission-critical to successfully handling the increase in complexity is good data management. The more complex the supply chain architecture, the more data it produces, and the more visibility across the chain required to keep things running as planned.?

Exceptional data centralization and management are key to achieving the kind of visibility you need to monitor and manage supplier risk, cost control, and regulatory compliance throughout the freight life cycle.?

This means we need to urgently accelerate the rate of digital transformation in the freight and logistics industry, deploying advanced data automation solutions to keep ahead of the ever-changing demands for agility and flexibility in the global supply chain ecosystem.