- Scaling across multiple suppliers and regions reduces the risk exposure for companies.
- Through freight consolidation, companies can simultaneously reduce overhead costs and leverage economies of scale by taking advantage of more efficient shipping rates.
- Establishing a comprehensive onboarding process for new suppliers, coupled with clear operating practices, can help maintain standards and ensure accountability as a network grows.
by Edward Routh
The pandemic caused widespread disruption across the global supply chain. The decades-old practice of “just-in-time” inventory, which emphasized supply chain efficiency above all else, now poses unacceptable risks to manufacturers, wholesalers, and retailers alike.
Today, it is all about durability and resilience. Consulting and accounting giant KPMG has even begun publishing a supply chain fragility index as a way to measure the global economy’s collective muscling up. The more diverse and redundant a supply chain, the more durable it becomes. How exactly should businesses utilize supply chain diversification, and what are the solutions that will foster future economic growth?
1. Scale Production
Scaling across multiple suppliers and regions reduces the risk exposure for companies, which is why even before COVID — so many manufacturers were building second, third, or fourth factories outside of China. Just this month, Apple announced that it would be manufacturing the Apple Watch and MacBook in Vietnam for the first time.
Operating in multiple countries spreads risk across several nodes of a supply chain, reducing the impact of a single point of failure. Furthermore, a bigger supply network itself can enhance the resilience of a supply chain, providing greater capacity to overcome a lack of supply elsewhere in the network.
2. Utilize Logistics Solutions
Just as the manufacturing process can be optimized, so too can logistics. Freight consolidation, for example, offers several opportunities for companies to improve their logistics efficiency by consolidating multiple smaller shipments into fewer, larger shipments. Through freight consolidation, companies can simultaneously reduce overhead costs and leverage economies of scale by taking advantage of more efficient shipping rates.
Nevertheless, migrating a company’s logistics model to a more consolidated one requires careful planning and execution. As such, companies will need to clearly and strongly understand both their lead times and inventory levels to prevent shortages from occurring during or after their freight consolidation process.
Another possible logistics solution is Extended Planning & Analysis (xP&A), which promotes the coordination and integration of all departments within a company to better inform business leaders in making important logistical decisions. Successful xP&A allows companies to forecast their shipments and plan ahead, saving time and money due to a more efficient shipping process, robust inventory management, and lower transportation costs. Unlike “just-in-time,” however, the focus here is not on efficiently managing inventory costs, but rather time and resources.
3. Avoid Over-Diversification in a Growing Network
While redundancy and diversification are both great conceptually, they can add complexity and cost in practice. For example, diversification can offer a wide range of benefits, but expanding a supply network too quickly can result in headaches.
It is important for companies to solve immediate supply chain issues, but also to focus on fewer, better suppliers, as opposed to quickly growing an unstable supply network without sufficient oversight. Over-diversification typically occurs when a supply network outgrows the infrastructure and resources required to sufficiently manage it. COVID accelerated this situation for many businesses by putting too much stress on the supply chain.
Goal
Establishing a comprehensive onboarding process for new suppliers, coupled with clear operating practices, can help maintain standards and ensure accountability as a network grows. If you want a strong company that can handle future growth, the foundation must be built correctly.
The reward is a stronger, more sustainable supply chain. Diversification can provide opportunities to access new sustainable practices and materials. It can promote growth through greater production capacity and scalability, something that was not a major consideration before demand exploded between 2020-2021 due to COVID.
Diversifying all of those nodes, including manufacturing and warehousing hubs, nearer shore will open up new supply routes with shorter shipping times. This creates cost savings and greater efficiencies. We may discover that by properly using diversification and other logistics solutions, “just-in-time” can become “always on-time.”
Edward Routh is an enterprise technology entrepreneur who strives to leverage emerging technologies to solve conventional challenges. A Co-Founder of Relloe, Inc, Mr. Routh is passionate about building strong, diverse teams who are able to achieve rapid innovation through quick iteration.