Supply Chain Strategy Unpacked: The Struggle to Diversify

Every day, businesses face fresh challenges that highlight the urgency of building resilient supply chains. Recent trade tensions combined with foodborne hazards and avian flu impacts have only heightened the need for strong strategies and nimble tactics. It is no surprise that diversification has become the central theme of supply chain strategy. And while the logic behind diversification is sound, the implementation can be far more challenging in practice than it is on paper.

The Shift Toward Integrated Networks

A growing trend in supply chain management is the move away from linear, single-supplier chains to integrated, diverse networks. This shift has been largely driven by the increasing complexity of global trade policies and economic uncertainties. The last decade has shown how important it is for organizations to prepare for volatility.

This transition to integrated networks requires more than just coordinated expansion. It requires long-term vision, operational overhauls, and, at times, investment. Businesses must evaluate costs, supplier availability, and their ability to manage more complex systems while adhering to regulations.

Streamline Before You Diversify

Before diversifying suppliers, companies often need to streamline their SKUs. This means understanding and optimizing existing systems and inventory to avoid unnecessary complexity. This process involves a few key components:

1. Reduce user-preference-driven variance in SKUs: By reducing low-demand or unneeded variations, businesses can simplify their operations while remaining responsive to customer needs.

2. Identify essential SKUs that are susceptible to supplier performance issues: Late deliveries and price volatility must be closely monitored to reduce vulnerabilities.

3. Closely monitor trends in supply and demand during periods of disruption: These can highlight opportunities to improve agility.

Streamlining is essentially about building efficient and transparent procurement and inventory management practices, so the decreased vulnerability or cost savings gained through supply chain diversification are not offset by the increased cost and complexity of maintaining them. 

When Solutions Aren’t Simple

The benefits of diversification are obvious. More options mean less vulnerability. Companies with diverse supply chains are better positioned to pivot when crises occur. We all thought this during the early days of the pandemic, but we receive frequent reminders with each new instanceof geopolitical unrest, weather-related disruption, or labor disputes. More recently, the impact oftariff-driven trade turbulence is finding its way into the financial statements of businesses across industries, creating something of a Rubik’s cube for supply chain management.

At its core, supply chain diversification involves creating flexibility and redundancy to mitigate risk. It means not relying too heavily on a single supplier, product, or region to meet production needs or demand. Whether it involves adjusting the number of SKUs or working with a wider network of suppliers, diversification can help companies adapt to disruption and maintain consistent operations.

But diversification brings its own challenges. Increasing the number of supply partners or product options adds complexity to logistics, inventory management, and compliance. Companies may also lose the opportunity to strengthen relationships with preferred suppliers andassociated with that, volume purchasing advantages. Balancing the dependency of a streamlined supply chain with the complexity of a diversified one can be a double edge sword. A good example is the restaurant industry, where quality and consistency can be the difference between a five-star rating and a flood of negative reviews. Finding the sweet spot is important to operational efficiency, but it’s critical to customer satisfaction.

Ultimately, a company’s ability to diversify suppliers for certain items may depend on how commoditized those products are. Medical supplies illustrate this well. While sourcing something as routine as bandages from multiple suppliers may be fairly straightforward, an elbow joint preferred by surgeons for its superior outcomes might only be available from a single manufacturer. This makes, "How diverse is diversified?" an industry-specific question with no easy answer.

Visibility and Collaboration Across Partners

For diversification to be effective, it must be accompanied by visibility and collaboration throughout the supply chain. A primary supplier supported by multiple backups is often considered to be an ideal setup but establishing and maintaining this scenario is notoriously difficult. Sometimes, even commoditized products have a narrow supplier base. 

Egg-flation provides a vivid example. Production capacity has been slashed in recent years due to avian flu outbreaks, which forced poultry farmers to cull millions of egg-laying chickens. This put additional strain on an already concentrated supply chain. Most of the US’s eggs are produced by just 400 farms and a mere two firms dominate 90% of the genetics used to breed laying hens. Rebuilding flocks takes time and resources, and egg substitutes can compromise taste, texture, and for those in the restaurant industry, customer loyalty.

How can companies achieve diversification in these conditions? One strategy is to try to developstronger working relationships across a wider pool of suppliers. This can involve longer-term agreements, shared forecasting, and collaborative problem-solving during disruptions.

Operational Resilience Beyond Diversification

While diversification is a key element of a robust supply chain, it is not a silver bullet. Businesses must also invest in processes, systems, and cultures that prioritize resilience. Diversification helps mitigate the impact of disruptions, but resilient operations ensure recovery is quicker and more effective.

Resilience is about more than just sourcing strategies. It requires that organizations prepare to adapt to rapidly changing demands, market conditions, and internal pressures. This could mean building agile manufacturing capabilities, adopting digital tools for real-time data, or fostering a culture that encourages contingency planning.

Adapting to Economic Pressures

Today's economic pressures, including inflation, fluctuating interest rates, and tariffs, are forcing companies to reevaluate their supply chain strategies. Diversified, resilient supply chains are becoming a strategic priority for many as they look for ways to offset costs and secure stability.

Businesses that look ahead and invest in relationships with alternate suppliers, local sourcing, or even vertical integration often emerge stronger during uncertain times. 

Diversifying your supply chain can hedge your risk from disruptions, bolster resilience, and create growth opportunities. Steps organizations can take include streamlining operations, evaluating risks, fostering collaboration, and continuously adapting. 

Although a challenging task, when implemented thoughtfully, diversification helps companies better weather uncertainty.