Supply Chain Diversification

Multi-sourcing focuses on quantity rather than geography. The most common approach involves adding redundant suppliers, although integrating additional manufacturing capacities is also standard practice. Diversification can take place within local or regional ecosystems, such as adding a new supplier located in the same city. Multi-sourcing is primarily used to mitigate financial or operational risks, such as a supplier’s inability to deliver on time or at all.

The breadth of a company’s supply network can range from having a single supplier for a specific part or product (low) to maintaining multiple suppliers on multiple tiers for each part or product (high).

Although multi-sourcing is not a new concept, and companies across all sectors continually assess and adapt their supplier bases, there has been a noticeable increase in recent years driven by higher supply chain volatility. The 2022 EY Industrial Supply Chain Survey found that 62% of 6 industrial companies surveyed had made significant changes to their supplier base in the previous 24 months and 77% had or were planning to increase their total number of suppliers.

One of the world's largest fashion groups provides a prominent example of a business effectively leveraging multi-sourcing on a global scale. The company strategically spreads its supply chain across thousands of facilities and direct suppliers worldwide. This strategy allows the company to adapt swiftly to peak customer demand and leverage the unique strengths of each supplier. Multiple suppliers also mean it can respond quickly to disruption, redistributing production to ensure products are always in stock.

The third dimension centers on utilizing more modes of transportation for the trade lane of a particular product or part. Adding at least one mode to any part of the supply chain (first mile, long haul, last mile, etc.) makes a supply chain more diversified than it was before. Modes include air, ocean, rail, and road. Simultaneously, using various modes of transportation or multi-modal solutions for a part or product also typically diversifies shipping routes, which can reduce operational risk and buffer volatilities in demand.

It’s important to note that adding modes of transportation is not a contingency plan but rather a parallel transportation method for the same point-to-point connection. Furthermore, different modes of transportation offer varying lead times, which must be considered and aligned with the business model.

Mode diversification spans from one mode for each part or product (low) to parallel modes for each part or product (high).

A retail market leader for example provides a best-practice example of this dimension of supply chain diversification. Aiming to respond rapidly to consumer preferences and trends within 10 to 14 days, the company utilizes all modes of transportation across all supply lines, opting, for instance, to ship goods via air freight between regions rather than using slower ocean freight. This allows swift and flexible stock reallocation between markets based on customer requirements and any disruptions.

The final dimension of supply chain diversification involves expanding logistics capabilities. This means augmenting the logistics infrastructure with additional capacities, such as hubs, warehouses, and distribution centers. Depending on the requirements, this could include redundant logistics capabilities in other locations both near and far. Diversifying logistics operations may also involve outsourcing certain logistics activities. Like multi-shoring and multi-sourcing, a diversified logistics operation provides alternative options that maintain continuity in the supply chain during disruptions.

The spectrum of logistics operations diversification ranges from a single logistics operation for a specific need (low) to multiple redundancies across diverse geographies (high).

A global sportswear and athletic equipment manufacturer provides an excellent example of a company transitioning from a centralized to a decentralized and diversified logistics network. While the company aims to optimize profitability, the goal of its supply chain strategy is also to improve resilience. It delivers products from production sites directly to regional and local warehouses, enhancing resilience and cost efficiency. The company has also increased its logistics footprint, establishing a presence in South America and India, opening a new hub in southern Europe, and expanding operations along the east and west coasts of the United States.