Supply Chain Efficiency vs Resiliency
Supply chain managers have for years discussed the pros and cons of diversifying their supply sources, generally concluding that it was more effective to rely on a close relationship with a low-cost supplier. But several recent developments mean that you should urge your firm to re-examine the issue. In particular, periodic Covid shutdowns of factories and ports have left some firms in a tough spot. And trade spats have taken a nasty edge, be it U.S. restrictions and tariffs, especially on China, or other countries’ politically motivated steps – think of the Chinese periodic measures to limit exports of the rare earth minerals essential for many electronic products.
“Reshoring,” or returning to U.S. suppliers, can be expensive, but so too can lengthy delays in getting essential inputs. The Wall Street Journal reports that in May 2020, nearly a quarter of companies told the Institute for Supply Management they are planning to reshore or to “nearshore” to close-by countries some or most of their operations (Mike Cherney, “Supply-Chain Woes Lead to New Thinking,” Wall Street Journal, December 28, 2020, https://www.wsj.com/articles/firms-want-to-adjust-supply-chains-post-pandemic-but-changes-take-time-11609081200, behind a pay wall).
Another approach is to diversify sources, that is, to develop alternative suppliers to whom one can turn if a problem hits the main supplier. This can be a particularly prudent step when the main supplier is in area subject to natural disasters – typhoons, earthquakes, etc. – or to political disruptions in trade. We at Mobus Creative Negotiating have long advocated considering developing an alternative so that your sole-source supplier does not become lazy, greedy, or overconfident – in other words, using the alternative supplier as a means to keep the sole-source supplier honest, efficient, and low price. But supply-chain reassurance provides a different reason to work with such alternative suppliers even if they are not cost-effective, namely, to provide insurance against a disruption of the flow from the main supplier. This insurance only works if you make sure the alternative supplier can fully meet your needs and that they have the capacity you would want in a time of crisis.
In deciding whether to go down this route, you need to carefully consider what level of risk you are prepared to accept that the main supplier may drop out. For instance, if the loss of the main supplier for a particular item would bring your firm’s entire output to a screeching halt and replacing that supplier would take a long time, then those factors which argue for laying out the extra cash to be sure that you have a backup when needed.