Should You Diversify Or Not – Increasing Supply Chain Efficiency

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A relatively recent entrant among major business processes, supply chain management is an area which has gained considerable import in the last few decades. The turn of the century brought with it numerous changes to the existing structure of supply chain management, with companies focusing on streamlining their supply chain to gain more bottom-line savings. Everything from sourcing of raw materials and searching for suppliers, till the final product reaches the hands of the end customer comes under the umbrella of supply chain management.

The enormous scope of the field and the incredible cost savings it can result in has made it a primary focus in all major organizations. Supply chain professionals around the world are continuously on the lookout for ways to increase the efficiency of their company’s supply chain. One major aspect in this regard is diversification of supplier base for increased efficiency. What does diversification mean in this context though? And how can it help better the supply chain? Let’s find out.

Among the major components of supply chain management, procurement and sourcing is particularly important due to its direct effect on the company’s spending. When a company needs to make purchases, it must first identify and determine an appropriate supplier base. The procurement department is responsible for these functions, among others. More often than not, companies strive to diversify their supplier base, considering it the right way to increase efficiency. While diversification in this regard is generally considered beneficial, it may not always be the case. To determine feasibility, companies must first analyze their situation.
Conducting a thorough spend analysis is a crucial step before making any hasty decisions when it comes to most aspects of supply chain management. Weigh the pros and cons and calculate expected savings in the future if you do go for a diversified supplier base. Tracking corporate spending at present would be a good idea and will help the company analyze if spend can be streamlined further if more suppliers are acquired. Ask yourself if the new supplier implementation costs make sense in the long term.

Consider for example a case where a firm has low volume orders only. In this particular case, the company probably doesn’t have enough volume to divide between two or more suppliers, and therefore, a single supplier would serve them best. Another example in which a single supplier would work best would be if a firm requires highly specialized materials, particularly if conformity is required. Multiple suppliers would be a bad idea then.

Final word: the decision whether to diversify or not to diversify can only be done after a company does its homework properly first. A cost benefit analysis is essential before making a move, and must be done with strategic intent in mind. Procurement software can be used by the company for tracking corporate spending and facilitating the process, making it easier for the company to make the diversification decision since all the data would be available at their fingertips.