How diversification helps improve supply chain resilience amid global crises

The once uninterrupted march towards ever-more globalization and economic integration across the globe saw efficient global supply chain operations become taken for granted. Now, companies are scrambling to diversify their logistics networks as disruption becomes ingrained.

For decades, reducing the costs of production was manageable. A firm simply had to outsource manufacturing to developing countries, which were often eager to provide a low-tax, low-regulation environment to attract investment from foreign firms.

However, in recent years, the status quo has been shaken. From the ongoing impact of the Covid-19 pandemic to national lockdowns, and the invasion of Ukraine, the question of ensuring robust global supply chains in the face of global disruption, and avoiding consequences such as shortages, has been at the forefront of conversation for industry stakeholders in recent years.

These unprecedented events exposed the vulnerability of global commerce. It has forced businesses and international policymakers to rethink their operations and to develop links between economies which can withstand future unpredictable fluctuations. Economic forecasts indicate that diversification is becoming increasingly popular as a strategy.

Diversification as strategy

Among the most popular methods to make global supply chains more robust is diversification. Or, more specifically, using multiple suppliers, transport modes, and routes rather than relying on one.

Acquiring alternatives to fall back on if a disruption or unexpected event were to occur allows companies to reduce their dependence on a single supplier or global pathway. Rather than transporting car parts end-to-end solely from China through the Port of Shanghai, producing components in other Asian countries, such as Vietnam, Malaysia, or Indonesia, allows firms to bypass that region if it were to become disrupted.

This strategy has become the new norm for international firms, especially those involved in shipping and logistics. Companies are recognizing the inherent supply chain risks and challenges associated with relying on simplistic economic couplings and weak means of distribution.

CMA CGM, for example, has formed a long-term strategic partnership with Air France-KLM. This will see both parties sell their air freight capacity jointly and CMA CGM become a reference shareholder in Air France-KLM. This means the French transport and shipping firm can widen its options as demand becomes more complex worldwide.

Another example is supply chain leaders involved in semiconductor logistics. A disproportionate amount of the microchips produced in the world that make technology functional are made by Asian providers. Specifically, Taiwan produces over 60% of the world’s semiconductors and over 90% of the most advanced ones. And most of these are made by one company – Taiwan Semiconductor Manufacturing Corporation (TSMC).

Having the world’s technology reliant on one corporation within a disputed territory subject to a number of weather-related problems has been a major problem for procurement. This is why lawmakers across the world have been looking to localise chip manufacturing and diversify their semiconductor supply chains.

The main benefit that stakeholders have noted when it comes to value chain diversification is a significant reduction of risk. By proliferating across multiple suppliers, transport modes, and routes, companies can reduce their reliance when a failure occurs and avoid blocking the entire system.

Keeping supply chains robust

Minimizing vulnerabilities is usurping short-term profit maximization now that disruption is considered a given in an increasingly unpredictable global context. Businesses have sought to expand partnerships with multiple suppliers in different regions, establish regional distribution centres, and explore alternative methods.

While not everything can be foreseen, geopolitical conflicts, natural disasters, trade disputes, and pandemics all have shared features. From a logistics perspective, they can all be, at least partly, circumvented so long as alternative trading opportunities exist.

Global commerce is likely not going anywhere soon. If the objective is to improve the system and ultimately improve customer satisfaction while overseeing risk management, supply chains won’t be scaled back. They will only become more diverse and complex in the face of changing reality.

Drifting away from the comfort of a single supply point for sourcing also means the potential for better quality control. More options mean companies can become more judicious regarding their suppliers and their standards. If a company is seeking customer satisfaction by reducing the risk of recalls or returns, then diversification is the logical aim.

More complexity

While diversification has its benefits, as with all big shake-ups there are some potential downsides. One significant drawback is the inevitable increase in complexity and management required when dealing with multiple suppliers, supply networks, and transport routes.

The task of coordinating and aligning operations across diverse networks inexorably leads to higher administrative costs. It also creates potential issues with communication both internally and with new partners.

Likewise, having to manage multiple suppliers, transport modes, and routes can be cumbersome. The expansion of both personnel and infrastructure requires further resources, expertise, coordination and communication.

Dealing with increasingly sophisticated logistics is one thing, but firms will simultaneously see increased inventory levels too. Holding raw materials in different locations to mitigate supply chain disruptions can put strains on existing capital and increase carrying costs. 

The cost factor

Despite the initial driver of globalized supply chains being economies of scale, in the long-term diversification can also lead to cost optimization. Having access to multiple supplier networks allows companies to determine the most cost-effective option. Transparency and more choice mean they can find every opportunity to lower transport, keep production low-cost, and increase efficiency.

Conversely, while it may reduce expenditure in some sectors, in others, diversification may be the more costly strategy. The use of multiple transport routes increases overall requirements – regional bureaucracy, regulations, geographic considerations, rates, fees, and so on.

While the problems of relying on one supply point may be circumvented, with each new supplier may come new distinct contracts, quality control procedures, and logistical coordination. This can lead to further administrative requirements and operations. More transport also means companies need to manage multiple routes, improve nearshoring, and hold safety stock at various locations, which can be a costly endeavour. 

Impact on control

Whilst diversified supply chains can encourage higher levels of quality, as the network grows the more challenging it can be to manage.  As a result of conscious expansion, a company working with multiple partners can have a depreciating impact on its sole control over the supply chain. Having trade points scattered globally can make it severely troublesome to ensure that each stakeholder is meeting a certain standard for quality, delivery times, and other important metrics.

Additionally, companies may have less bargaining power with individual suppliers if they are not a major portion of their business. This can limit negotiation and the ability of companies to access more favourable pricing and terms.

Tools for Transparency

Part of diversifying economic networks and trade routes inevitably requires improvements in visibility. Container tracking solutions, like MarineTraffic Visibility for Containers, can help companies to monitor and manage their supply chains more effectively.

These solutions use real-time data and analytics to track containers and vessels in transit, providing companies with greater visibility into their operations and build a more resilient supply chain.

By using supply chain visibility solutions, companies can identify potential issues and bottlenecks in their supply chains and take proactive measures to address them. For example, if a vessel carrying a container is delayed, the company can use this actionable insight to adjust their planning, inform potential stakeholders and improve overall operational efficiency.  Ultimately, it is up to companies to decide for themselves whether the benefits of diversification outweigh the potential costs and what methods they use to achieve their logistical reforms. The consensus remains, however, that global disruptions, whether they are geopolitical, sustainability-related, or economic, are now factored into all supply chain management decisions.

Blog Banner for VFC

Jason Dunn
Senior Account Executive at London-based public relations agency, Navigate PR