THE CASE FOR SUPPLY CHAIN DIVERSIFICATION
Supplier consolidation is a great way to reduce costs and improve supply chain effectiveness, but it doesn’t come without risks. Disasters around the world often expose the global supply chain to risks and threats.
In this context, you need to determine when the benefits of supplier consolidation are offset by the costs of unforeseen incidents and find ways to mitigate risk.
The benefits of supplier consolidation
Many businesses have opted to limit the number of suppliers they deal with. At first glance, the benefits seem obvious:
- Reduced procurement costs – Dealing with fewer suppliers means fewer transactions to process, fewer negotiations, etc.
- Higher bargaining power – A customer who purchases a product in high volumes is in a better position to negotiate advantageous terms including volume discounts.
- Stronger supplier relationships – When there are fewer suppliers to manage, it becomes easier to build deeper and longer relationships with key suppliers.
But regardless of the amount of money it saves, supplier consolidation can be a risky move. When there are too few suppliers, any failure or important change on their part can severely impact operations and cause damages that go significantly beyond the initial cost savings.
Increased exposure to the risks of supply-chain disruption
These are some of the most common causes of supply chain disruptioni:
- Natural disasters – The effects of climate change are already being felt as natural disasters such as floods, droughts, hurricanes and wildfires get more severe and more frequent.ii
- Cyber attacks, IT or telecommunications outages – Although not as devastating as major natural disasters, this type of event can cause company-wide disruptions even for companies that are geographically dispersed.
- Interruption of transportation – The risk is particularly high when there is only one economical mode of transportation as is often the case with overseas suppliers.
- Failure of a supplier’s own supply chain – Your own suppliers may be at risk.
- Price fluctuations – The price of certain raw materials is volatile, so is the exchange rate between certain countries.
- Health and safety incidents – Some industries and countries may be more at risk than others.
- Geopolitical instability – While civil wars, protests and riots inevitably come to mind, this category also includes trade wars.
The cost of a supply chain interruption can be significant. In some cases, it can permanently affect the organization’s reputation.
Supply chain diversification reduces risk
While a certain level of supplier consolidation makes sense, being dependent on a handful of strategic suppliers increases the risk of disruption.
Every business is different. That’s why you need to conduct a thorough business impact analysis to determine the best business continuity arrangements.
In the meantime, you can start looking closely at your list of critical suppliers and identify the ones that would severely disrupt operations should they fail. Do you have a plan B in place?
Finding alternate suppliers takes time, so it is best not to delay the process—even for suppliers that serve you well.
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ii Riglietti, G, Aguada, L Business Continuity Institute, BCI Supply Chain Resilience Report 2018, viewed June 17, 2019 https://www.thebci.org/uploads...
ii World Meteorological Organization March 28, 2019, State of Climate in 2018 shows accelerating climate change impacts, viewed June 17, 2019 https://public.wmo.int/en/medi...