Supply Chain Diversification

Supply chain diversification is a manufacturing business terminology used to describe the act of increasing choices for when to order what supplies from whom to bring products to the market. In short, it describes the abundance and flexibility of the suppliers for a certain product. As in any business decision, there are advantages and disadvantages to having more or less diversity in the supply chain.

Supply chain diversification is not a simple method of making suppliers compete with each other for the best price. It is more about preparing one's supply chain to be flexible for any kind of problem that the market throws at you.

Simply having an abundance of suppliers does not mean that one has supply chain diversity. Each supplier must provide similar and/or equal products and be distinguishiably competitive in such a way that each supplier is mutually exclusive under certain conditions. That is to say, supplier Alpha and supplier Beta both sell identical sprockets. Alpha sells each sprocket for $1.00 a piece and can fulfill the order in 24 hours. Beta sells each sprocket for $0.25 but they will take two weeks to fulfill. The trade-offs between time and cost is the decision one must make.

In diversifying the supply chain for one's products, it is also necessary to assist and educate the suppliers on what one expects from the suppliers and what one intends to do with the supplies. It becomes important to maintain an open line of communication with all the suppliers, and this in turn will increase the overhead necessary to maintain the managers/reps for each supplier. To minimize the overhead involved, one may utilize a proceduralized method of developing a relationship with their supplliers such as RFPs and taking bids on jobs.

When doing business with multiple companies, such is the case here, it may become necessary to standarize one's paperwork - such as RFQs, and purchase orders. As price fixing is illegal in countries such as the United States, accountable paper trail management becomes a legal obligation for companies seeking supply chain diversification.

In the International market, import and export regulations may become a hurdle for finding the right suppliers to diversify ones supply chain. This is especially true for US businesses after 9/11. The US customs department has enacted new regulations such as C-TPAT to encourage trade. The extra time and money spent on certifying a supplier for regulations like C-TPAT is another trade-off that management must consider when diversifying their supply chain.