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Supply Chain Diversification model

Source: DHL Group (2024): Supply Chain Diversification Trend Report

Relevance to the Future of Logistics

Multi-shoring the supply network

The first dimension involves geographical diversification. Multi-shoring means introducing redundant manufacturing capacities or additional supplier locations in separate areas. This might include adding locations in other countries or even continents to mitigate operational, compliance, or reputational risks. Multi-shoring can involve the same supplier but from an additional location – for example, getting the same part from two different plants.

The spectrum of multi-shoring diversification ranges from a supply network built on one country (low) to one widely dispersed across multiple countries or even continents (high).

As an example, after years of manufacturing most of their products in China, many technology companies are now seeking to add manufacturing capabilities elsewhere, mainly in other Southeast Asian countries, often referred to as the “China+1” strategy.

For instance, HP is shifting its laptop production to Thailand, and Foxconn is moving a portion of its assembly capabilities from China to Vietnam. Tech-giant Apple is also shifting production from China, where currently most iPhones, iPads and other Apple products are produced, to India, Vietnam, and other Asian countries. Apple now builds around 14% of its iPhones in India, twice the amount it produced there the previous year.

Also in 2022, LEGO Group announced plans to invest more than US$1 billion in a new factory in Chesterfield County, Virginia, their first in the United States and seventh factory globally.5 The company has served the North American market from their site in Mexico. LEGO Group says that they position their factories close to their biggest markets to shorten the distance their products must travel, allowing the company to rapidly respond to changing consumer demand and better manage their carbon footprint.

Multi-sourcing the supply network

Multi-sourcing focuses on quantity rather than geography. The most common approach involves adding redundant suppliers, although integrating additional manufacturing capacities is also standard practice. Diversification can take place within local or regional ecosystems, such as adding a new supplier located in the same city. Multi-sourcing is primarily used to mitigate financial or operational risks, such as a supplier’s inability to deliver on time or at all.

The breadth of a company’s supply network can range from having a single supplier for a specific part or product (low) to maintaining multiple suppliers on multiple tiers for each part or product (high).

Although multi-sourcing is not a new concept, and companies across all sectors continually assess and adapt their supplier bases, there has been a noticeable increase in recent years driven by higher supply chain volatility. The 2022 EY Industrial Supply Chain Survey found that 62% of industrial 6 companies surveyed had made significant changes to their supplier base in the previous 24 months and 77% had or were planning to increase their total number of suppliers.

One of the world's largest fashion groups provides a prominent example of a business effectively leveraging multi-sourcing on a global scale. The company strategically spreads their supply chain across thousands of facilities and direct suppliers worldwide. This strategy allows the company to adapt swiftly to peak customer demand and leverage the unique strengths of each supplier. Multiple suppliers also mean they can respond quickly to disruption, redistributing production to ensure products are always in stock.

Parallel modes of transportation

The third dimension centers on utilizing more modes of transport for the trade lane of a particular product or part. Adding at least one transport mode to any part of the supply chain (first mile, long haul, last mile, etc.) makes a supply chain more diversified than it was before. Modes include air, ocean, rail, and road. Simultaneously, using various modes of transport or multi-modal solutions for a part or product also typically diversifies shipping routes, which can reduce operational risk and buffer volatilities in demand.

It’s important to note that adding modes of transport is not a contingency plan but rather a parallel transportation method for the same point-to-point connection. Furthermore, different modes of transport offer varying lead times, which must be considered and aligned with the business model.

Mode diversification spans from one mode for each part or product (low) to parallel modes for each part or product (high).

A retail market leader for example provides a best-practice example of this dimension of supply chain diversification. Aiming to respond rapidly to consumer preferences and trends within 10 to 14 days, the company utilizes all modes of transport across all supply lines, opting, for instance, to ship goods via air freight between regions rather than using slower ocean freight. This allows swift and flexible stock reallocation between markets based on customer requirements and disruptions.

Diversifying logistics operations

The final dimension of supply chain diversification involves expanding logistics capabilities. This means augmenting the logistics infrastructure with additional capacities, such as hubs, warehouses, and distribution centers. Depending on the requirements, this could include redundant logistics capabilities in other locations both near and far. Diversifying logistics operations may also involve outsourcing certain logistics activities. Like multi-shoring and multi-sourcing, a diversified logistics operation provides alternative options that maintain continuity in the supply chain during disruptions.

The spectrum of logistics operations diversification ranges from a single logistics operation for a specific need (low) to multiple redundancies across diverse geographies (high).

A global sportswear and athletic equipment manufacturer provides an excellent example of a company transitioning from a centralized to a decentralized and diversified logistics network. While the company aims to optimize profitability, the goal of its supply chain strategy is also to improve resilience. They deliver products from production sites directly to regional and local warehouses, enhancing resilience and cost efficiency. The company has also increased its logistics footprint, establishing a presence in South America and India, opening a new hub in Southern Europe, and expanding operations along the east and west coasts of the United States.

Challenges

Challenge 1

The process of sourcing, pre-qualifying, onboarding, and managing a larger number of suppliers demands significant time and resources. This challenge becomes particularly pronounced when diversifying dimensions such as multi-sourcing, multi-shoring, and logistic operations, as they introduce increased complexity into the supply chain.

Challenge 2

Building a new supplier infrastructure in a different country or region for multi-shoring purposes presents challenges, as it necessitates acquiring new organizational knowledge and skills.

Challenge 3

In terms of the multi-sourcing dimension, diversifying the supply chain network to focus specifically on the source of components and materials can reduce the risk of a full manufacturing or retail backlog, but can also increase the likelihood of a partial disruption as each source has its own risk factors.

Challenge 4

The utilization of multiple modes of transportation can pose challenges concerning the carbon footprint of companies, as it has the potential to escalate CO2 emissions and adversely affect sustainability objectives.

Challenge 5

In general, diversified supply chain setups can increase the operational costs and therefore reduce profitability.

The process of sourcing, pre-qualifying, onboarding, and managing a larger number of suppliers demands significant time and resources. This challenge becomes particularly pronounced when diversifying dimensions such as multi-sourcing, multi-shoring, and logistic operations, as they introduce increased complexity into the supply chain.
Building a new supplier infrastructure in a different country or region for multi-shoring purposes presents challenges, as it necessitates acquiring new organizational knowledge and skills.
In terms of the multi-sourcing dimension, diversifying the supply chain network to focus specifically on the source of components and materials can reduce the risk of a full manufacturing or retail backlog, but can also increase the likelihood of a partial disruption as each source has its own risk factors.
The utilization of multiple modes of transportation can pose challenges concerning the carbon footprint of companies, as it has the potential to escalate CO2 emissions and adversely affect sustainability objectives.
In general, diversified supply chain setups can increase the operational costs and therefore reduce profitability.

Outlook

Supply chain diversification has already become a popular theme in supply chain management. It is an essential strategic lever for building resilience, enhancing customer centricity, driving profitability, improving sustainability, and gaining a competitive advantage.

With disruption accelerating, diversified supply chains are expected to become increasingly significant. Recent experience demonstrates that companies with strategically diversified supply chains are better positioned to navigate uncertainties and seize emerging opportunities. Today’s new normal demands continuous assessment and more regular reconfigurations of supply chains to meet new requirements, enhance risk profiles and maintain or improve agility and resilience.

Transparency and visibility across the entire supply chain are imperative and the foundation for success, with state-of-the-art technology, supply chain management tools and strong partnerships playing a decisive role.

This trend should be ACTIVELY monitored,with implementations available for many use cases today.

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Sources

  1. 1. DHL (2024): 2024 DHL Global Connectedness Report
  2. 2. Accenture (2023): Resiliency in the Making Report
  3. 3. Bloomberg (2024): Apple’s India iPhone Output Hits $14 Billion in China Shift
  4. 4. Lego (2022): The LEGO Group to build US$1 billion, carbon-neutral run factory in Virginia, USA
  5. 5. EY (2022): Why global industrial supply chains are decoupling