Making the Case for a More Diverse Supply Chain

Supplier diversity is a concept with multiple definitions.  Most commonly, a supplier diversity program focuses on the utilization of women owned, minority owned, and else certified diverse businesses within your supply base.  There is, however, another interpretation of supplier diversity – a diversity of geographical location, sourcing practices, and overall organizational structure.  Evaluating these factors in a meaningful way when evaluating suppliers can be an important factor in managing supply chain resiliency, sustainability, and adaptability.

When undergoing a supplier rationalization exercise, the goal of selecting top performing, cost competitive companies whose capabilities transcend multiple purchasing categories is clear.  What is not always apparent are the benefits of a more in-depth evaluation of supplier capability overlap with else diverse characteristics and how it can be crucial to an optimal supply chain.  Maintaining relationships with multiple suppliers in a category can be resource exhaustive, and splitting the business can lead to missed cost reduction opportunities associated with leveraging your entire market basket.  There are, however, greater risks that come with the sole supplier approach, and evaluating a supplier beyond their capabilities in a single category, and as an overall entity with individual risk factors and strengths, will fortify your supply chain without overusing resources managing relationships.  The benefits will ultimately increase your supply chain optimization.

Supply Chain Resiliency:   A more diverse supply base can mitigate risk by introducing more flexible capabilities without necessarily creating redundancy.  According to a 2015 study by the Business Continuity Institute, 74% of organizations have experienced a disruption in their supply chain.  50% of these organizations experienced an interruption with a primary (first tier) supplier.  If a supplier rationalization exercise creates a supply chain that is too lean, there is risk of an interruption that will affect your bottom line.  Maintaining an overlap of capabilities between suppliers with proven track records across purchasing categories will support your supply chain without simply being costly deadweight.  Supply chain resilience presents an opportunity to gain a competitive advantage over other industry players by quickly adapting during an interruption and reducing the customer or shareholder’s impression of perceived risk.

Sustainability: In particular, sustainability protects supply markets from undue environmental, social, and economic interference.  Evaluating suppliers from both an input and output perspective will offer insight on their sustainability focuses and values.  For the first time, business ethics incidents were listed as a top 10 reason for supply chain interference.  While unethical practices amongst suppliers is certainly not something to look past when choosing a supplier, there is no guarantee that full transparency will always be available.  Maintaining suppliers with diverse social responsibility policies is an often overlooked but important factor in evaluating your supply chain.  Economic and environmental interruptions can be mitigated with the use of geographically diverse suppliers.  Currency volatility, changes in laws and regulations, as well as adverse weather are all common reasons for supply chain interruptions.

Adaptability:  Consider a product that has evolving requirements throughout its lifecycle.  A simple example is a smartphone.  At the beginning of the product’s lifecycle, buyers are less sensitive to price and more dependent on product availability.  As the cycle of the smartphone continues and a new model is being developed, the price is a larger decision point for consumers and demand decreases as inventories have been built.  Maintaining a diverse supply base can allow you to utilize suppliers that fit your need throughout the product lifecycle, and can also help you adapt to innovation and new product development.

Creating a truly optimal supply chain is not as simple as consolidating tail-spend and reducing costs, nor is renationalization limited to making the supply base as small as possible.  An effective rationalization process needs to evaluate the diversity of all supplier inputs - what they have to offer, and supplier outputs - their performance history.  Allowing for strategic overlap in supplier capabilities while diversifying outlying areas such as geographic location, organizational values, and financial structure will result in less risk, while still reducing the resources needed to manage an overly-robust supply chain.  In part 2 of this series, we’ll discuss how to translate these needs into an RFP and how to establish a supplier diversity program that drives value from your supply chain beyond cost savings.