Supply Chain Diversification

Trend Overview

Impact:

High

Realization:

5 - 10 Years

Focus Areas:

Customer Experience Visibility & Resilience

Trend Clusters:

Sectors:

The trend of Supply Chain Diversification refers to the reconfiguration of the supply chain to broaden the supplier ecosystem and expand manufacturing and distribution networks, with the aim of increasing resilience, agility, responsiveness, and competitiveness. This trend encompasses related concepts like multisourcing (partnering with multiple competing suppliers) and multishoring (selecting providers in more or different countries or regions).

Globalized supply chain networks have given a tenfold boost to worldwide merchandise trade volumes since 1980, exceeding 28 trillion USD in 2021. In recent years, patterns of protectionism, intense natural disasters, and infrastructure congestion, as well as the Covid-19 pandemic and geopolitical crises, have collectively pressured organizations to adjust their supply chains, embarking on a new path of resilience rather than receding from the global stage.

Many industries have already begun the realignment of sourcing practices, manufacturing footprints, and distribution networks to maintain service levels and exploit regional cost differences in labor, materials, energy, and more. For example, Taiwan Semiconductor Manufacturing, the world’s leading silicon wafer foundry, announced plans to build a 12 billion USD plant in Arizona to serve its customers in the US, while Mazda has shifted production of some auto components from China to Mexico.

The trend of Supply Chain Diversification will have high impact on logistics operations, from connecting new regions upstream to changing existing transportation modes. However, the realization of such a trend will not be immediate. While some aspects could be implemented in a few weeks, like contracting with a redundant carrier, the larger components of Supply Chain Diversification – those with the greater benefit to resilience, like building another factory closer to a consumer market – will require years to come to fruition.

As supply chains continue to be exacerbated, much focus has been placed on increasing resiliency.

Source: Ernst & Young; Buck Consultants International

Relevance to the Future of Logistics

Multiple Suppliers

Usually out of simplicity and economies of scale, many organizations often rely on a single supplier for particular resources, assets, or labor. Geopolitical events over the last few years have strained global supply chains, slowing production and delivery times for millions of customers and highlighting the need for logistics organizations to reduce dependency on just one source of supply.

Multisourcing is a popular go-to solution for supply chain leaders, as it typically involves minimal adjustment to the supply chain with newly added suppliers tending to service the same hubs and ports as the existing supplier. However, simply adding suppliers in the same country or region may only improve resilience to a certain degree, proving fruitful in the event of a local flood but less so in the event of regional conflicts or large natural disasters like the 2004 Indian Ocean tsunami.

Although requiring more calculations and planning, supplier multishoring can increase the resilience benefit by broadening the geographic pool of suppliers. Recent political and commercial uncertainty led many businesses across industries to pursue a ‘China Plus One’ strategy, in which components and pieces are dual-sourced from China and another country, like Mexico, India, or Thailand. Whether a B2B customer is pursuing China Plus One or any other multishoring strategy, logistics service providers will need stricter supply chain management with increased visibility. For such use cases and to meet these increased demands, DHL offers customers its specifically designed Inbound-to-Manufacturing solution, as well as its Lead Logistics Partner solution.

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Technology-Powered Localized Manufacturing

Frustrated by longer and less reliable delivery times for customers, many businesses in various industries have moved or are considering moving some or all manufacturing locations closer to customer markets. For instance, in 2022, 70% of surveyed US businesses intended to bring production closer to the US, while many European textile companies have already began exploring more European and North African countries as potential production site locations.

One major enabler of this growing shift is the advancement of automated technology in manufacturing. While initial investments may be high, next-generation robotic solutions in a factory located in more expensive region have pushed down costs per manufactured unit to a level where that facility can effectively compete with the lower manual labor costs in less expensive regions. For some task-specific robotic devices, returns on investment (ROI) have been achieved in less than 2 years.

Parallel to this, the steady development of 3D printing may eventually bring about a future of hyperlocalized manufacturing, in which whole products can be cost-effectively made and assembled in a customer’s local neighborhood.

Overall, the benefits of greater resilience and faster time-to-market encourage many manufacturers to reconsider production closer to market. Organizations that are mature and have long-established supply chains, are more likely to supplement rather than fully replace existing production sites. Additionally, as raw materials may still need to be sourced from far away and be delivered to a factory or 3D printer, supply chain organizations need to continuously monitor upstream supply risk. DHL’s partner Everstream Analytics does exactly this, leveraging advanced analytics and artificial intelligence to assess the risk to customers’ global supply chains in real time.

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Redundant Freight Lanes & Carriers

As many organizations across industries focus on finding redundant nodes, like factories and raw materials suppliers, in the supply chain to improve resilience, an alternative approach involves the diversification of freight lanes between nodes. The easiest method for organizations exploring this approach is to partner with multiple same-mode carriers along a lane between an origin and a destination. In other words, instead of relying only on one trucking company to deliver products from Mexico to the US, the organization would rely on two or more trucking companies, spreading the risk across all partners in the event of an isolated incident like a truck breakdown. However, the resilience benefits are limited as this method may not be immune to larger forces like a closed border or a fuel shortage.

A more diversified strategy is to adopt bimodal or multimodal redundancies in freight lanes. In this strategy, at least two modes make deliveries side by side within a freight lane. Besides the resilience benefits, this redundancy strategy also opens opportunity for new diverse offerings. To illustrate a scenario, consider the retailer that has traditionally transported spare parts in bulk shipments from India to the Netherlands via cargo ship. Due to increasing congestion in ocean freight, the retailer recently began sending parallel shipments via freight train to maintain its customer delivery schedule. However, realizing there is a market for emergency spare parts, the retailer has also been experimenting with same-day air delivery to the Netherlands to provide new offerings to customers.

As such, some modes, like the cargo ship or freight train in this example, are chosen to purposely operate in a generally well-understood and predictable environment, compared in terms of efficiency and cost to serve, while other modes, like the airplane, are adopted to improve agility and speed or explore new solutions that address and solve uncertainty such as unexpected changes in demand or external shocks. Running various solutions in parallel can leverage the advantages of them all. In future, however, experts see a need for companies to not only become at least bimodal but also prioritize multimodality, quickly recognizing possibilities and building the ability to solve problems posed by the unexpected.

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Challenges

Sourcing and pre-qualifying, as well as onboarding and managing a higher number of suppliers, requires time and resources; it also introduces more complexity into the supply chain.

Building a new supplier infrastructure in a different country or region requires the acquisition of new organizational knowledge and skills.

Changing the manufacturing footprint takes time and requires significant investment.

Diversified supply chain setups can increase the costs to serve and therefore reduce profitability.

Diversifying the source of components and materials may cut the risk of a complete backlog in manufacturing or retail, but it can also increase the chance of partial disruption as each source experiences its own set of risk factors.

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This trend should be MODERATELY monitored, with some use cases applicable today.

Outlook

Supply chain diversification occurs as organizations depart from agendas driven purely by cost efficiency and service levels to additionally focus on resilience, agility, and flexibility. This shift requires more sophisticated management of logistics operations, including design and inventory control, and may necessitate more investment and longer-term planning. Some say this indicates a weakening of globalization but, to be clear, we here at DHL see this as the result of a more globalized economy.