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Supply chain diversification as a procurement strategy

by Editor

In the event of a disruption, an overdependence on individual suppliers or geographical regions can lead to serious bottlenecks in procurement and production. Many companies are aware of the importance of strategic supplier management and are considering an increased diversification of their procurement. We explain strategies that companies can use in order to unleash the full potential of a well-diversified supplier portfolio. 

A diversified supplier base increases delivery reliability

If the supply chain is disrupted, delivery deadlines can no longer be met – in a worst case scenario, this means that production comes to a standstill. As a result, there is a risk of lost revenues, which can quickly wipe out even the profits of a lean, efficient supply chain. Relying on a variety of suppliers on the other hand allows you to have fallback options in the event of a disruption. However, greater supply chain diversification is a strategic challenge – the more complex a supplier network, the more difficult it is to keep track of all processes and requirements.

Distributed risk: Dual and multiple sourcing

In order to reduce dependencies, companies can rely on dual or multiple sourcing at all TIER levels. Even the distribution to two suppliers offers advantages: If one supplier fails to deliver, the other steps in. The distribution of supplies can be defined in the supplier management system on a percentage basis and varied as required. An even greater spread of procurement is achieved with the multi sourcing strategy. Systematic distribution among several suppliers increases security considerably, but also requires greater logistical coordination and better information management.

Leveraging geographic proximity: Near, national or local sourcing

To diversify the supplier base, identifying suitable producers and suppliers in the European environment is one way of securing procurement through shorter distances. Central and Eastern European countries in particular are becoming an interesting option due to their innovative strength and low wage levels compared to Germany. In this context, Poland, the Czech Republic, Hungary and Serbia are among the emerging procurement markets. Another way to secure procurement through shorter transport routes in an economic area with uniform standards is the integration of local and national suppliers.

Expanding global sourcing: Sourcing in emerging regions

For many companies, global sourcing is a guarantee of survival against global competition. To avoid becoming too dependent, companies can consider expanding their supply network to include reliable partners in geographically neighboring regions of the current production site. For example, companies that currently source their products, components or parts mainly from suppliers in China can supplement their network with collaborations in the emerging neighboring countries of India and Pakistan. Both locations offer high potential in terms of innovation, workforce and modern structures. Companies that rely on experienced partnerships for their expansion plans – be it in production or logistics – can further benefit from numerous advantages and gain access to a growing domestic market in addition to excellent export conditions.

Taking control and providing an overview: Digitized supplier management

In addition to the strategic development of the supplier network, the targeted management and control of procurement processes is crucial. The more complex the global network, the more challenging communication and process coordination become. Transparency, however, is the decisive factor in securing the supply chain against incidents or cyber attacks, meeting compliance and sustainability guidelines, and monitoring cost development. In this context, digital tools and software solutions provide ideal support.

Intelligent supply chain management software:

An intelligent supply chain management software considerably facilitates supplier management. Benefits include the central bundling of all master data, certificates, freight and inventory data. It enables the sharing and coordination of guidelines and codes of conduct, just as the detailed transmission of product data and schedules. Further, a clear visualization of the processes in a supplier scorecard and a reduced communication effort facilitate coordination. Hence, everyone involved in the company, at the suppliers and at the logistics service provider is always informed about schedules and the progress of processes. Locally stored supplier and delivery documents, Excel lists and time-consuming coordination processes thus become obsolete. Connection to a cloud-based SCM platform is particularly convenient and cost-efficient.

Integrated risk management software:

Risk management software  provides additional security. Using artificial intelligence, it filters and evaluates data from thousands of media information sources in real time and issues alerts as soon as it detects conspicuous events in the company’s or suppliers’ environment. This enables immediate responses in the event of risk occurrences – be it severe weather, political unrest, or violations of social or sustainability guidelines.

Partnership-based cooperation and coordination of logistics

An expanded supplier network requires finely tuned interaction between all the stakeholders involved as well as efficient logistics coordination. Digital networking of the company, the suppliers and the logistics partner significantly increases the level of collaboration. If the chosen logistics service provider not only provides the physical infrastructure, but also the digital infrastructure – for example, via cloud-based SCM software – the connection of suppliers, transport and risk data can contribute to particularly smooth processes. In this way, freight management as well as logistics processing can be adapted to new requirements in an agile manner. Activating an alternative supplier in the event of the main supplier’s failure or redistributing quotas is quick, uncomplicated and visible to all thanks to real-time coordination. In this way, all supply chain processes can be efficiently coordinated and smoothly handled, even in a broad-based supplier management system.

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