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The pandemic—and its effects on global supply chains—held insights for manufacturers, suppliers, and retailers alike. Some questioned the validity of the popular just-in-time model for supply chain management. Others are seeking ways to make their supply chains more resilient, so they’re able to flex in response to future global incidents.
Diversification can be a key strategy for reducing the effect of disruptions on your supply chain. Simply put, supply chain diversification is the real-world application of the old adage, “Don’t put all your eggs in one basket.” It asks supply chain managers to reduce their reliance on single sources for components, supplies, and/or finished goods. That way, if one source is hit with a natural disaster, political turmoil, or a similarly disruptive event, alternative sources can keep operations moving forward.
Three relatively recent global events have only underscored why this strategy is so important for businesses of all types.
Event #1: China’s 2021 Power Problems
In September & October 2021, reports started filtering in that Chinese factories in at least four provinces—Guangdong, Heilongjiang, Jilin, and Liaoning—that delayed production due to power outages. As more information became available, Reuters reported that more than 10 provinces and regions in total were under power restrictions. All in all, as much as 44% of the country’s industrial activity was affected, according to an estimate from Goldman Sachs.i
The causes of the power problems originated with:
- A country-wide surge in energy use as factories ramped up production in response to global demand for goods from China
- A coal shortage, which drove up prices and hit China hard; the country used 53% of the world’s coal-powered electricity in 2020ii
Sectors hit hardest by China’s power problems include:
Textiles
Plastics
Semiconductors iii
As a result of these challenges, Goldman Sachs downgraded its previous prediction for the growth of the Chinese economy to 7.8% from 8.2%.iv
Experts continue to monitor the impact on local and global supply chains, especially where semiconductors are concerned. The slowed pace of production at the affected factories will certainly have implications for anyone partnering with those operations.
These challenges in China also emphasize an important aspect of supply chain diversification. Seeking out alternative suppliers mitigates some risks. However, locating suppliers in different geographic regions will offer even greater protection against disruption, especially when it comes to regional problems like this one.
#2: Vietnamese Factories Shut Down in Response of COVID-19
The COVID-19 pandemic continues to have long-reaching effects on the global supply chain. This was certainly the case for Vietnam, a country that manufactures significant quantities for a number of U.S.-based apparel brands. Long seen as a strong alternative to China, Vietnam makes apparel for big names that include Nike, Lululemon, Abercrombie & Fitch, Chico’s, and Land’s End.v
Vietnam held the coronavirus pandemic at bay more effectively than many other countries, keeping infection rates low.vi However, as the coronavirus started to spread widely in May 2021, the country responded with shelter-in-place orders and factory shutdowns. In the 10 weeks of shutdowns in factories producing Nike footwear, the company estimated that their losses translated to about 100 million pairs of Nike shoes not made.vii The CFO of Big Lots, Jonathan Ramsden, stated that factory closures in Vietnam cost his company $60 million in lost sales.viii
Many American companies scrambled to move production to other countries, including Chico’s and mattress company Culp, who looked to its options in Haiti.ix
Ultimately, the pandemic factory closures in Vietnam offer another example of the importance of maintaining geographic diversity within a supply chain. Whether it’s an outbreak of a communicable disease, a natural disaster, or even a political uprising, a regional event can throw a serious wrench into a supply chain that’s dependent on a single supplier or even multiple suppliers within a single area.
#3: The Suez Canal Blockage by the Ship Ever Given
Even as it was lampooned via social media memes, the blockage of the Suez Canal by the container ship Ever Given in March 2021 had serious implications for supply chains. When the vessel grounded, completely blocking the critical shipping lane, the schedules of more than 300 vessels were affected.
Estimates from Lloyd’s List suggested that $9 billion in goods goes through the canal each day.x The total estimated goods delayed during the blockage was pegged at around $60 billion in total.xi
In addition to a surge in container spot freight rates,xii many companies were left high and dry while crews struggled to free the ship:
- Containers of robusta coffee, a critical ingredient in instant coffee, were stuck in the canal, which moves almost all of Europe’s imported coffee beans.xiii
- 80 containers of tea were delayed, which left the Dutch Van Rees Group desperate as their supplies dwindled.xiv
- Even Ikea was impacted, with a total of 110 containers stuck in the backup.xv
In short, any company relying on freight passing through the Suez Canal was affected by the incident. So, in addition to finding suppliers who are separated geographically, you’ll also want to be aware of any other common bottlenecks, such as the Suez Canal. Considering a second container ship got stuck in the Suez in September 2021, locating a second supplier who’s not dependent on that route would make for a more resilient supply chain that’s ready to react in case of another incident.
Now that we’ve examined a few examples of supply chain disruptions, let’s talk more about how supply chain diversification can reduce your organization’s risks from occurrences like these.
How Exactly Does Supply Chain Diversification Work?
In a supply chain diversification strategy, an organization reduces its reliance on a single supplier by working with multiple suppliers. As the above examples demonstrate, it’s important to go beyond simply finding a secondary supplier. Instead, look for a supplier in a different geographical area, one who’s ideally not reliant on the same infrastructure—such as the Suez Canal.
Global consulting firm PwC calls their version of this strategy Global +1.
PwC’s Global +1 Diversification Strategy: Extending a footprint to another geographic locale to add resiliency to a single-sourced supply chain.xvi
As an example, the firm suggests a few strategies for companies single-sourcing in China. Their options including nearshoring to Mexico, reshoring to the U.S., or sourcing within other low-cost areas of the world, including southeast Asia, India, and Northern Africa.xvii
In addition to geography, supply chain diversity can also focus on:
- Distance: The now-famous backlogs at the Ports of Los Angeles and Long Beach squeezed a number of U.S. manufacturers who were waiting for components from overseas. As a result, some companies may consider diversifying by seeking suppliers close to home. Of course, cost is a consideration. Components made in the U.S. may cost more than those made overseas. However, by purchasing even a small percentage of supplies in the U.S.—or in Mexico—you’ll have uninterrupted access to materials that don’t rely on ocean freight, in case of issues like the 2021 port backups.
- Freight Modes: The pandemic threw a wrench into a number of different freight modes, forcing many organizations to rethink the way they move items around the globe. Working with a freight forwarder to re-evaluate your freight mix—and create a backup plan in case of problems—can make you more nimble during supply chain disruptions.
Preparing for the Next “Black Swan” Event—and Beyond
COVID-19 may have been a “black swan,” once-in-a-lifetime event, one whose ripple effects will likely continue to be felt in supply chains for years to come. However, regional incidents like the grounding of the Ever Given, or the 2011 Tohoku earthquake and tsunami in Japan, will continue to pop up.
Diversifying your supply chain will help your organization prepare for the massive disruptions as well as the regionalized ones. Whether your suppliers are facing a natural disaster, political turmoil, severe weather, an energy crisis, a supply shortage, or any of the other incidents that can affect entire regions, your diversified supply chain will be ready to flex and respond.
If you’re rethinking your supply chain planning this year, our experts would love to help. We’ve been helping our clients create resilient supply chains for 30 years, and we’d be happy to talk to you. Get started by requesting a free consultation.
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