Supply chains have become indispensable for global commerce in the rapidly evolving global economy. However, the pandemic has exposed the vulnerabilities and risks of concentrated supply chains. Production, transportation, and distribution disruptions have cascading effects on the global economy. Globally, diversifying supply chains has become an urgent imperative to enhance resilience and minimise disruptions caused by unforeseen shocks, such as natural disasters, geopolitical conflicts, and pandemics.
The primary goal of diversification is to create stronger safety nets, flexibility, and adaptability within supply chains, enabling them to withstand external shocks with minimal disruption. Achieving this involves various approaches, such as expanding the number of suppliers, implementing redundant logistical solutions encompassing multiple modes of transportation, and considering near- or re-shoring options to bring operations closer to home.
A survey by Ernst & Young reveals that many industrial companies have taken significant steps to diversify their supplier base, establish operations in new countries, and conduct near- or re-shore operations. Despite the associated costs, businesses prioritise resilience in their supply chains. Challenges arise from the previous focus on efficiency, cost reduction, and globalisation in concentrated supply chains. COVID-19 and other crises have exposed concerns and vulnerabilities related to transportation, shifts in consumer demand, and inventory management procedures. This necessitates a shift towards diversified suppliers, increased supply chain visibility and resilience, adaptability to shifting market conditions, and embracing digital transformation.
While diversifying supply chains enhances resilience, it also introduces complexity and potential challenges, such as increased environmental, social, and governance risks. Despite these challenges, building robust, agile, and resilient supply chains is worthwhile. However, achieving this will require a rare level of visibility in the freight and logistics cycle during supply chain reconfiguration. To foster diversification efforts, companies should actively seek multiple domestic and international suppliers to form strong partnerships that promote resilience and healthy competition. Evaluating regions based on policy stability, infrastructure, labour costs, and market proximity is essential to mitigating concentration risks and expanding operations to new areas.
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