Your organisation may be one of the many organisations nowadays relying upon external third parties to conduct a range of businesses processes on your behalf. But how can you be sure that you’re not outsourcing too many of your core processes? The answer is supplier diversification. Supplier diversification plays a crucial role in enhancing organisational resilience and it involves engaging multiple suppliers or service providers to fulfil various needs within an organisation. In this article, we will be exploring why this strategy can be a means to protect the health of your supply chain.
The benefits to supplier diversification
Firstly, supplier diversification can provide a means to mitigate risks. By engaging more than one supplier, you can reduce the risk of disruptions caused by a single supplier's failure, which is a key component of effective business continuity planning. If a primary supplier faces challenges, such as financial instability, production issues, or natural disasters, having alternative suppliers in place ensures a continuity of supply and minimises the impact on your organisation's operations. Equally, your organisation is better equipped to handle unexpected events or disruptions, such as geopolitical conflicts or global crises like pandemics. Diversification allows for a more flexible and adaptable supply chain, reducing dependence on a single supplier, geographic region, sourcing location, providing greater organisational resilience. By having multiple suppliers, your organisation can develop robust contingency plans to mitigate risks and ensure continuity of supply in case of disruptions. This proactive approach to business continuity minimises the impact of unexpected events and facilitates faster recovery.
Secondly, diversifying suppliers also helps your organisation manage market volatility effectively. Fluctuations in market conditions, such as price volatility or supply-demand imbalances, can impact the availability and cost of goods or services. With a diversified supplier base, your organisation can adjust sourcing strategies, negotiate better terms, and explore alternative supply sources to mitigate the impact of market volatility. This is particularly relevant nowadays, given the impact of challenging and volatile macro conditions.
Next, another motivation for supplier diversification is to reduce the reliance on a single supplier, as creates a single point of failure within the sourcing process. Supplier diversification ensures that no single supplier has complete control over your organisation's supply chain or operations. This reduces vulnerability and enhances your organisation's ability to manage and recover from potential disruptions more effectively.
Engaging a diverse range of suppliers can be a great way to foster innovation and drive competitive advantage. Different suppliers bring unique perspectives, capabilities, and solutions to the table, enabling your organisation to tap into a broader pool of expertise. Your organisation may be able to gain access to skills that you do not have in-house, therefore potentially broadening the services you are able to deliver to customers. This diversity can result in the introduction of new ideas, technologies, and approaches, enhancing your organisation's competitiveness in the market.
Supplier diversification can also lead to financial benefits, including greater negotiating power and cost optimisation. Having multiple suppliers provides leverage to negotiate favourable terms, competitive pricing, improved service levels. It also enables your organisations to optimise costs and avoid potential price hikes or unfavourable conditions imposed by a single dominant supplier. Your organisation may also choose to diversify the location of your suppliers to support with keeping delivery costs down if there are multiple locations for production. Therefore, diversification can have significant cost benefits, including increased profitability, better pricing strategies and can minimise operational risks.
In conclusion, supplier diversification can provide significant benefits to your organisation. To achieve sourcing resilience, we recommend conducting a thorough needs analysis prior to engaging multiple suppliers, including the identification of risks and potential solutions. During the sourcing process, we recommend then that thorough supplier evaluations take place, including assessing suppliers’ capabilities, costs, quality, performance, capacity and reliability. Once suppliers have been identified, vetted and chosen, it’s important to establish strong relationships with them, and maintain clear communication channels. In the management of suppliers, we encourage that you ensure that there are systems and processes in place to regularly monitor and evaluate the ongoing performance and outcomes of suppliers, as these are vital to maintaining sourcing resilience over time. While supplier diversification can provide significant benefits to your organisation, the answer is not to simply undertake this process without conducting a comprehensive sourcing process and implementing strong supplier management systems. Done correctly, it could give your organisation the competitive edge you’re looking for.
Maistro are experts at running a fully digital sourcing processes - if you’re looking for support for build resilience into your supply chain, get in touch with us today for how we can support you.
