The Importance of Supply Chain Diversity
Date posted: 11 April 2017
Posted in: Supply Chain Management
In this blog post, I want to talk about the importance of supply chain diversity and why it’s beneficial for large companies to look to diversify their suppliers. Not only does this strategy present significant advantages to the company in hand in terms of agility and the ability to adapt to a changing market, but it also has significant economic and social benefits.
Let’s begin then, by looking at what supply chain diversity actually means.
What is Supply Chain Diversity?
Supplier diversification is a term that is associated with the strategy of manufacturing businesses to broaden the range of suppliers they work with in order to increase choice and abundance when it comes to the supply chain. By working with a larger set of suppliers, manufacturers are able to become more flexible, adapting to a constantly changing market.
Two common variables we see in terms of assessing supplier suitability are time and cost. Whilst different companies will assign different weight to each, it can pay to have a choice. For example, if Supplier A sells rivets for 25p with a one week delivery time and Supplier B sells them for 35p with one day delivery time, the choice becomes one between cost and speed.
Whilst your company might assign more value to the speed of delivery, this may change for any number of internal or external reasons, such as a shift in business strategy or an increase in raw material costs, pushing up the price of rivets nationwide. In other words, whilst supplier B might be best suited to your business model today, circumstances could shift in future, meaning supplier A becomes the better option. Working with both means you have the ability to adapt quickly to changing conditions.
Why is Supply Chain Diversity Important?
There are many reasons that supply chain diversity is important, at an organisational and macroeconomic level. Broadly though, these can be split into four areas, which I’ll discuss in brief now.
- Access to innovation and creative thinking
Communication with suppliers is not a one-way street, where the manufacturer places an order and the supplier fulfils it. Working with a diverse range of suppliers means having access to brains outside your organisation, helping to fuel innovation and more creative approaches from within it.
- Commitment and quality of service
As we’ve seen, supply chain diversity allows for greater flexibility. We explored a simple example looking at cost vs speed, but there are numerous other choices that supply chain diversification can bring. The ability to be flexible means you can respond to changing market trends and customer demands and provide a higher quality service.
- Different cultures drive better approaches
A diversified supplier base means, as a business, you are more likely to be a reflection of the customers you serve. By broadening your geographical supplier base you are able to offer more competitive prices at the local level. SMEs tend to be more flexible and tuned into their customers than large global suppliers, and big business can benefit greatly from this.
- Cost savings
According to research, working with diverse suppliers can help you cut your costs by a third. A 2015 study by the Hackett Group found that, on average, supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement operation costs. It’s not always true that the largest suppliers can offer the best cost efficiency either, with many SMEs being able to bring a lot more to the table because of their specialism in a particular product or area.
A more Resilient Economy
Beyond the organisational advantages we’ve discussed, at a national level though, the benefits to the economy of large corporates diversifying their supply chain are numerous. These economic benefits have been encouraged through various UK legislation, such as the Localism Act 2011, Public Services (Social Value) Act 2012, Best Value Statutory Guidance (2011) and the Equality Act 2010.
The UK Government has also set targets for SMEs to represent 25% of all UK wide procurement, which is a modest target when you think that 99% of all UK businesses are SMEs. And yet big suppliers continue to dominate the supply chain, with just 25% of contracts awarded to SMEs. The dangers of such a rigid and monopolistic supply chain economy are obvious in these economically uncertain times, with big businesses less able to cope with rising tariffs and a changing import-export market.
How to Diversify your Supply Chain?
There really are no secrets to diversifying your supply chain, but that’s not to say that the process doesn’t come with some significant challenges. The first thing that needs to happen is a change in mindset. Try to think of your suppliers as customers, instead of the other way round. Ask them a lot of questions and try to make it easier for them to work with you.
Create a manageable strategy that includes clearly laid out processes for assisting and educating suppliers through the process. You will no doubt have a lot of old legacy suppliers you have worked with for years and they need to be included in this process, as it’s likely many will stay your primary supplier after the supply chain process is in place.
Building your new and improved diverse supplier base can be daunting but there are various avenues to go down in this respect. Networking through organisations and trade bodies that represent certain industry sectors, small businesses, women or minority business groups is one avenue. Including details of your supplier diversification program on your website, with a detailed web form is another. However you approach the supplier sourcing side, it’s important to get your processes and paperwork standardised, as an accountable paper trail is a legal requirement for companies seeking to diversify their supply chain.
Even without the social and reputational benefits supplier diversification brings, the potential for huge ROI through numerous cost savings and efficiencies, a diverse supply chain makes simple commercial common sense. But there’s so much that it can bring your business. By establishing a diverse supplier base you aren’t just saving money, but enhancing your reputation as a socially conscious organisation, whilst opening the doorway to new thinking and innovation, a higher quality of service, an adaptable and resilient business model and ultimately a more satisfied and loyal customer base.