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Why Supplier Diversification is the Cure for Manufacturing Supply Chain Management

Jan. 10, 2023
We all know not to put all our eggs in one basket, but in today’s environment we need to be thinking about where those baskets come from, too.

To keep those baskets in stock, supplier diversification turns out to be an essential strategy for manufacturing supply chain management. It involves spreading out your company's reliance from a single supplier to a pool of partners, giving you multiple sources for the goods and parts you need to run your business. Depending on your manufacturing efforts and where you’re positioned in overall supply chains, this supplier diversification can also work for services and specialty functions or applications for parts.

Ultimately, it helps protect your operational effectiveness, as it minimizes the risk of disruptions or delays caused by issues at a single supplier. With recent years showing us the risks of streamlining without a net, diversification looks to be a key issue in 2023.

Benefits of Eliminating Single Sources of Failure

There are several reasons why supplier diversification is essential to the manufacturing industry. First, it helps to reduce the risk of a single point of failure in your supply chain. If you rely on a single supplier for a critical component or raw material, and that supplier experiences a disruption or delay, it can have a cascading effect on your entire production process.

That means no basket to hold the eggs and everything goes to waste. Instead, diversifying your supplier base can mitigate risk and give you backup baskets or other containers that are viable options. Everything keeps moving, even when a single supplier can’t fulfill an order. Many supply chains diversified their carrier selection for the same reasons, and it can be a good reminder of how important the process is for protecting operations.

In addition to reducing risk, supplier diversification can also help to improve the overall efficiency of your supply chain. When you have multiple suppliers competing for your business, you can often negotiate better prices and terms. You may also find partners located in different regions that can supply different production locations—potentially reducing your freight costs on every order while speeding up delivery times.

This can lead to cost savings and improved profitability for your company by tackling operational efficiency errors and trimming down costs per unit.

It Doesn’t Have to Step on Toes

There are several ways to approach supplier diversification. One option is to work with multiple suppliers for each product or service that you need. This ensures that you have a backup plan in place if one supplier experiences a disruption. Each partner can be negotiated with separately and you can make regular orders with each, ensuring goods are always flowing to you. This means you’re not suddenly jumping in or shifting production to any specific partner, which helps protect overall operational security.

Another option is to work with a single supplier, but with a backup supplier in place as a contingency. This can help to reduce the cost and complexity of managing multiple suppliers, while still providing some protection against disruptions. In this case, you can secure reliable partners by being honest around the backup nature of secondary suppliers. Tell them why you’re creating the relationship, when you may need it and that you’ll reach out in times of urgency. You may pay higher rates for this type of relationship, but your secondary suppliers know that time is of the essence and that failures or delays will cost them any future business with you.

5 Steps to Take for Successful Diversification

Supplier diversification helps you get around bottlenecks, but it can be a tough structure to employ. Getting it right takes time and patience; here are a few steps you can take to help ensure your success.

  1. Identify strategic needs. Begin by identifying the key needs that are critical to your business operations and prioritize them for diversification. Don’t start with a list of suppliers. Build out your risks and potential solutions, then look for suppliers that are materially different from existing partners so that you’re not sourcing two companies that both rely on the same upstream provider.
  2. Evaluate potential partners. Once you have identified strategic needs, start evaluating potential alternative suppliers for each category. Consider factors such as cost, quality, delivery performance and capacity to meet your needs. Ask for referrals and recommendations from existing customers. Run an RFP or evaluation process that is as rigorous as any other mission-critical element. This is an area where some may be lax because they’ve already got a primary supplier, but the last thing you want is to find out the alternative is low quality when everything else is in disarray.
  3. Build relationships honestly. Once you have identified potential alternative suppliers, start building relationships with them. This can involve negotiating contracts, establishing communication channels and setting up systems for tracking orders and deliveries. Explain your approach and business needs. Bring them in on the importance of either regular or emergency support and see what you can do to maintain the relationship and stay on their priority lists.
  4. Implement systems for managing multiple suppliers. To effectively manage a diversified supplier base, you will need systems in place. Typically, you’ll want tools to be EDI capable for tracking orders, monitoring performance and ensuring reliability for your business. An EDI focus makes it easier to integrate with supplier and partner portals, scorecards, ordering tools, and other management systems.
  5. Monitor performance and review outcomes. Ongoing monitoring and review of supplier performance is essential to ensure that your supplier diversification strategy is effective. This can involve regular review of supplier performance metrics, such as on-time delivery and quality, as well as conducting periodic reviews of the overall effectiveness of your supplier base.

Supplier diversification is a key strategy for manufacturing supply chain management. It helps to reduce risk, improve efficiency and protect your operational effectiveness. By diversifying your supplier base, you can ensure that you have the goods and services you need to run your business smoothly and effectively, no matter what challenges may arise.

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About the Author

Jake Rheude

Jake Rheude is the Vice President of Marketing for Red Stag Fulfillment, an order fulfillment company for online retailers and ecommerce businesses specializing in heavy and large products. He brings a highly motivate approach to learning and sharing all aspects of order fulfillment and business management, alongside traditional marketing, SEO, and brand positioning. Marketing plays a pivotal role in the ability to attract and audience and build loyalty, and Jake’s goal is to show companies how shipping is essential to that relationship by creating a promise you must meet with every purchase.