A key strategy for mitigating risk, and coping with the many disruptions of the last few years, is supply chain diversification. It puts organizations in a better position to adapt to changing circumstances, and deterioration of the business environment. 

Yet diversification comes with its own set of challenges, including increased costs and operational inefficiencies. So how can companies strike the right balance between streamlining operations and diversifying their supply base?

Before leaping into diversification, businesses should do some corporate soul-searching — and, perhaps, housecleaning. A good place to start is to streamline stock-keeping units. 

Such a process involves building efficient procurement and inventory-management practices. It’s essential to ensure that the savings derived from a more diverse supply chain aren’t wiped out by additional costs or complexities related to maintaining those extra vendors.

Review your inventory and, where feasible, reduce any product variations that are unnecessary or don’t sell well. SKU rationalization  allows you to simplify your operations and still meet customers’ needs. 

You’ll also want to identify products that are susceptible to supplier performance issues, such as late deliveries and price hikes. These should be monitored closely, because they represent areas where your operation might be especially at risk. 

Also, watch supply and demand trends during times of disruption. This can help in identifying ways to improve flexibility and responsiveness. 

Visibility and Collaboration

Companies also need to have clear visibility into their supply chains, and collaborate with all partners involved. The ideal setup is to have a primary supplier supported by several backups. But what’s ideal isn’t always realistic. It can be challenging to establish and maintain such a setup, and there are instances where even commoditized products have a narrow supplier base.

A recent example of such a narrow supplier base is what happened with the hike in egg prices that left consumers frustrated. Avian flu outbreaks forced poultry farmers to cull millions of egg-laying chickens, putting a significant dent in egg production. Replacing those hens takes time, and egg substitutes don’t have the taste and texture that restaurants and customers desire.

The situation is especially troublesome because this is an area where supply is already limited. In the U.S., about three-fourths of egg-laying hens are raised on fewer than 350 farms, and two companies control 90% of the breeding stock. Clearly, diversification under these circumstances has its limits.

Under such conditions, what can companies do? The answers aren’t easy, but a good approach is to build stronger relationships across a more extensive group of suppliers. This might involve longer-term agreements, shared forecasting, and collaborative problem solving when disruptions occur.

Ensuring Operational Resilience 

Although diversification is a critical component of a sound supply chain, it’s not a magical solution or cure-all for the issues we face.

Businesses need to take other actions, including investing in  processes, systems, and cultures that prioritize resilience. While diversification can help limit how severe the effects of a disruption are on your company, you’ll be able to recover more quickly and effectively from interruptions in the normal course of doing business, if you’ve taken steps to make sure your operations are resilient.

Resilience goes beyond just devising strategies for where to source materials. It means preparing your organization to respond to sudden changes in customer demand, shifting market conditions, internal challenges or anything else that might derail your routine processes.

For example, you could make your manufacturing capabilities more flexible, use digital tools to help rack data in real time, or foster a culture that encourages collaboration and continuous improvement. 

Diversifying your supply chain is challenging, and isn’t a panacea for all the ills we face. But businesses that look ahead, improve relationships with their suppliers, and bolster resilience within their operations will put themselves in a better position to emerge even stronger from volatile periods.

Peter Follows is chief executive officer and co-founder of Carpedia, a global management consulting firm, and the author of Results Not Reports.