Are Supply Chains Diversifying Sourcing To Become More Resilient To Global Disruptions?

Diversifying sourcing is now widely being seen as a critical step in making supply chains more resilient to cope with global disruptions. A trend that has accelerated during the ongoing COVID saga.

The years 2020 and 2021 were hugely disruptive years. 72% of the companies experienced external disruptions to their manufacturing supply chain as per 3D Hub’s Supply Chain Resilience Report.

After years of globalization, trade disruptions such as US-China trade war, Brexit and the ongoing pandemic is prompting economies to reduce dependency on global integration and focus on themselves and their neighbors. Many manufacturers are trying to reduce their dependency on China as pandemic exposed the fragility of the supply chain network, be it due to factory lockdown, tariffs or logistics disruptions. However, global supply chain network revamping has to be followed carefully without hampering critical relationships.

Only 21 percent of the respondents in a recent survey done by Gartner indicated that they have a highly resilient network today; that means good visibility and the flexibility to shift sourcing, distribution, and manufacturing activities much faster. This advocates that growing resilience will be a primacy for many as they emerge from the ongoing crisis. According to this survey, more than half are going to be highly resilient in the next two to three years.

Diversifying sourcing – a vital step to build a resilient supply chain network

Last year, when the COVID crisis began in China, known to be the world’s factory the entire supply chain was disrupted across industries. Diversifying sourcing became an obvious way to mitigate risks in future.

However, to design a multi-sourcing strategy, it is essential that the supply chain leaders know their supplier network in-depth and should be able to classify suppliers not just by spend, but also by revenue impact in case of a disruptive event.

Diversification can be achieved by giving business to additional suppliers or working with a single supplier who can produce goods at several locations.

Predictably, the increasing interest in supply chain diversification brings to the fore the theme of re-shoring or near-shoring which goes arm-in-arm with a bigger focus on domestic markets. A Standard Chartered research indicated that 74% of US corporations and 84% of European companies are prioritizing their home regions as a source of growth.

All this calls for more production nearer to the home and to make supply chains less vulnerable. The organizations are now assessing their complete sourcing strategy and supply chain network design. This approach will ensure that the companies have multiple options and can determine the right balance between off-shore and near-shore manufacturing.

Multiple choice in the supply chain also means a wider opportunity to analyze cost, range of goods available, and location. Diversifying sourcing can also encourage competition among suppliers to drive down prices.

However, to diversify sourcing the suppliers also need to keep in mind certain factors to determine their supply chain network’s optimal resilience.

Vital Partners

While large enterprises might have resources to invest in a diversified network, their vital suppliers might not. Supply chain leaders will have to evaluate if their partners are weakened by the present conditions and are not able to support diversification strategy. In that case, they will have to look for more capable partners or slow down and may have to consider supportive actions.

More resilience involves more cost

An organization may choose to absorb the cost, or raise prices for its customers or share them with upstream suppliers. Similarly, the cost of not investing in resilience can also be high in terms of longer lead times, tariffs, negative impact on the brand, or decreased customer satisfaction.

National policies and incentives

Governments in many countries are now offering incentives to enterprises that move manufacturing closer to the end consumer or back. Bringing manufacturing back to the United States got a major push from politicians.

The crux

With the ongoing pandemic, there has been a heightened desire to shift production and sourcing out of China to other locations in Asia. Although this trend was going on for some time due to rising production costs in China but has strengthened by a sense of over-reliance.

However, shifting from China is easier said than done. A study from CBRE, a commercial real estate giant cited last year that while production costs in Vietnam were 30% lesser than in China, but the productivity was almost 20% lower and there were more quality issues. Industry experts suggest that there is more benefit in the ‘China plus one’ strategy for sourcing considering manufacturing capacity and sophistication in the Chinese industries.

All these things suggest that supply chains may be becoming more resilient by diversifying sourcing, but it’s not going to be that simple. The companies will have to still juggle with complexities and would need versatile and agile supply chain providers.