Diversify Your Supply Chain

If you are dependent on any region, non-friendly country, customer, supplier, material, or anything noteworthy to your success, you must diversify. Although this concept has always been true, the pandemic highlighted the critical importance. Some companies simply lost their source of supply overnight and have not recovered if not diversified.

From a financial and customer satisfaction perspective, it is always unacceptable, but not necessarily life threatening.  For products related to national security, medical/ healthcare, aerospace and defense, food and shelter and critical products, this outcome is completely unacceptable and high risk. Thus, companies are finally starting to diversify. For example, Mattel is closing a plant in China to diversify its production footprint. They are 50% made in China and actively working to decrease that number.

Examples of Supplier Diversification

Ripping from the headlines, you can find several examples of supplier diversification. For example, Avery Dennison credited supplier diversification for their success in working through the Finland ports strike. Speaking of port strikes, several large companies moved a portion of volume from the L.A. and Long Beach ports after suffering through the pandemic and when concerned about the labor negotiations.

A healthcare products company paid 20% more to get ongoing supply from a U.S. nonwoven supplier to supplement their Brazil supplier to the chagrin of their Board of Directors from a financial perspective. However, when a strike occurred at the ports in Brazil, they were able to seamlessly ramp up at their U.S. supplier and satisfy customer needs. If they hadn’t kept an ongoing supply, their backup supplier would not have prioritized them.

A small food and beverage manufacturer had a key customer for 70% of the business. Unfortunately, although that can happen as you grow the business, you must actively work to diversify as there is no doubt that customer will run into issues at some point in time. When that happens, you are likely to go out of business or suffer significantly.

Look no further than the current Boeing issues. Much of the commercial aerospace industry will be dependent on Boeing and Airbus. Complete diversification is not achievable. Clients have multiple customers; however, down-the-line, they are still dependent on Boeing and/or Airbus most likely. For example, with Boeing’s recent quality control issues, all down-the-line suppliers were ramping up to around 50 aircraft per month from around 36 aircraft per month when the quality issues hit. Now, the ramp up plans are uncertain if not non-existent until the quality issues are resolved and the FDA gives Boeing permission to ramp up. Airbus has experienced issues as well and so even with heavy backlogs, volumes will be down for an interim period.

Diversify Your Manufacturing Base

As we have discussed many times, being dependent on China will become a large problem. It could seem like a great, low-cost plan for the foreseeable future; however, when China gets into a global conflict (financial, military), you will be cut off. Or when your intellectual property and/or business information is stolen because it was on a China server, that might be the end. If you think you’ve diversified to Mexico but China owns the factory (for example, they are building auto factories currently), be aware of your risk. This is especially critical for national security and other key categories such as medical products. For example, to learn more about regional sourcing in MedTech read our article “MedTech’s Supply Chain: Global Risks Driving Regional Manufacturing“.

Proactive companies are diversifying their manufacturing base to multiple regions, multiple facilities related to multiple suppliers, multiple labor forces, etc. Companies are reshoring and nearshoring (friendly-shoring). Ensure you aren’t trading one issue for another as you should consider talent, regulations, energy, water, natural resources, your supplier base, transportation and logistics infrastructure, etc. Assess these types of diversification opportunities with a SIOP (Sales Inventory Operations Planning) process. Determine how to best utilize your assets, resources, supplier base, working capital etc. across your network and evaluate your opportunities to expand, scale up and/or down rapidly, etc. SIOP will also help evaluate margin opportunities If you want to learn more about how to implement these types of strategies, download our complimentary e-book, SIOP: Creating Predictable Revenue and EBITDA Growth.

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