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Avoiding Over-Diversification of the Supply Chain in a Growing Network

By Edward Routh, Co-Founder — Relloe

When consulting/accounting giant KPMG began publishing a supply chain fragility index earlier this year, it was a tacit acknowledgment of how concerned suppliers, wholesalers, and retailers have become with the network that moves our goods around the globe on a daily basis. News of 100-ship backups at the Port of Los Angeles and empty shipping containers abandoned on residential streets have made the front pages as consumers feel the pain of increased shipping costs at the cash register.

By June of 2022, the situation had become so dire that Home Depot consigned its own ship, and other retailers placed their Christmas orders months earlier than usual. Manufacturers have embraced another fix: diversifying both their production and logistics options.

The keyword is no longer efficiency, but resilience. Still, none of the global economy’s participants should forget that costs still matter, and that over-diversifying could become almost as big a mistake as relying on too narrow a supply chain.

Reducing risk

While it’s easy to blame Covid for the supply chain breakdown, the trend towards diversification actually started much earlier, with multiple provocateurs. One was increased manufacturing costs in China. Indeed, just before the start of the pandemic, it was widely reported that factory wages in China were rising far faster than in other parts of the world, like Mexico, where wages were already cheaper.

Then came the Trump administration’s trade war. Claiming that trade wars were “easy to win,” and asserting that China would quickly back down in the face of pressure, the US slapped a wide range of tariffs on billions in Chinese imports, including solar panels. Manufacturers immediately started looking for other places to make all kinds of products, from sneakers to cell phones. Bangladesh, Indonesia, and Vietnam have quickly become some new favorites; this past August, Apple announced that the Apple Watch and MacBook will both be assembled in Vietnam for the first time ever.

Manufacturing in multiple countries has the benefit of reducing concentration risk, minimizing a company’s exposure to geopolitical and economic disruption in any one country or region. No one wants to be stuck with a single point of failure during a trade war — or during a pandemic — and a more diverse supply network generally means more redundancy. If a Tesla factory is shut down by Covid lockdowns in China, for example, orders may be filled from a factory in Germany or Texas. The problem is that geographical diversification does not happen overnight, particularly when the finished product relies on components being manufactured at a single source elsewhere. The entire supply chain must be diversified, or the exercise is pointless.

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Optimizing logistics

And then there’s the question of getting the goods to their final destination. Shipping has been one of the major supply chain bottlenecks since Covid began, as well as the most publicized. Even as American ports have cut down on their backlogs, railroads are reportedly seeing increased congestion, and there is still a major shortage of truck drivers in the US. More goods are being shipped via air these days, but at a far greater cost, particularly since the onset of war in Ukraine, which has increased the cost of fuel considerably.

Freight consolidation presents significant opportunities for brands to improve the efficiency of their logistics. By consolidating multiple, smaller shipments into fewer, larger shipments, brands are able to take advantage of more efficient rates by reducing overhead costs and leveraging economies of scale. However, migrating to a more consolidated logistics model requires planning, and businesses need to have a strong understanding of their inventory levels and lead times to ensure no shortages occur during the transition or thereafter.

Another possible logistics solution is called Extended Planning & Analysis (xP&A). This promotes the coordination and integration of all departments within a company to enhance critical logistical decision-making. xP&A allows managers to forecast their shipments more accurately, increasing efficiency and lowering costs without the obvious drawbacks of the old “just-in-time” inventory paradigm. Rather than simply focusing on minimizing costs, xP&A takes a more holistic view of the entire logistics process.

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Avoiding over-diversification

The truth is that economic growth will always stress existing supply chains, and the sudden demand surge that occurred during 2020-2021 in the depths of the pandemic lockdowns was unprecedented. Back then, there was little time to focus on operating with fewer (but better) suppliers; most manufacturers were just trying to keep their factories humming and get products to their customers as quickly as possible.

At the same time, all kinds of businesses along the supply chain were struggling with employment. Oversight suffered as a result. Companies needed more resources to sufficiently manage their supply networks, but they had to make do with less.

It’s understandable that solutions to supply chain logistics have often been temporary and imperfect, but now is the time to properly rebuild it. For one, manufacturers should be establishing a comprehensive onboarding process for new suppliers. They should also hone their operations in order to maintain the highest standards as their supplier network grows. The reward will not only be a stronger supply chain for everyone, but one that can sustain the stress of the next black swan event.

For example, one of the most exciting opportunities we have is using diversification to “near shore” supply routes, resulting in shorter shipping times and lower costs — not just monetary, but environmental. Going forward, diversification should not just mean more nodes. Far more importantly, it should imply increased focus, accountability, and purpose.

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