Supply chains around the world continue to be affected by the COVID-19 crisis; some countries have been shut down entirely. However, outside of this pandemic, minor short-term supply chain disruptions occur for a variety of reasons—natural disasters, raw material shortages, factory fires, and more. Manufacturers with concentrated supply chains experience the highest level of risk for compromised operations because their ability to procure raw materials or manufactured goods can be directly impacted by uncontrollable factors. Mitigating this risk should be a key consideration when making decisions on where to source materials or products from in the marketplace.
Why Diversifying Suppliers is Key
Diversification of a supplier portfolio can protect a company from supply line shutdowns. The simplest form of diversification is finding at least two suppliers that can provide the same, or similar, product and keeping working relationships with both to prepare the additional sellers to ramp up production in case of increased need. Beyond supplier diversification, some manufacturers benefit from sourcing production supplies from a variety of geographic areas, given the potential environmental risks, including winter storms, wildfires, and earthquakes, that can interrupt transportation routes and facility operations.
Geographic concentration can pose more than just environmental threats. Manufacturers attracted to the cheap cost of labor overseas often utilize vendors in areas where foreign governments, or other relevant parties, have significant influence over industry supply chains, which may expose production to significant, unexpected delays. While these are the more common examples that indicate the importance of diversification, there are many instances, specific to certain industries, where supply chains can be put at risk without a broad supplier pool.
Spreading supply resources mitigates risk, but there are also potential costs to consider. A company may not reach the thresholds required to receive quantity discounts if it parcels out orders from multiple suppliers. Additionally, ordering a manufacturing module from multiple suppliers may result in varying quality standards. A cheaper vendor is good, unless it costs more in manufacturing errors, spoilage, or additional wear on equipment. These common factors must be weighed against expanding the supplier mix. Successful company managers will strive to achieve a balance between supply chain risks and keeping production up to the required standards.
If you have any questions regarding diversifying your supply chain, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.