Building Resilient Supply Chains: Insights on Diversification, Data, and AI

Unlock the secrets to building a resilient supply chain in our latest episode of the Chain Reaction Podcast.  Join us as we share invaluable insights on navigating the complexities of global trade in a world fraught with disruptions. Discover how companies are harnessing multiple sourcing and procurement deals to spread risk and avoid the pitfalls of over-reliance on single suppliers. Learn how balancing time, cost, and risk becomes an art form in maintaining quality and meeting specific standards amidst challenges like the pandemic, geopolitical conflicts, and natural disasters.

In this episode, we delve into the transformative power of data and artificial intelligence in fortifying supply chain resilience. Experts highlight the shifting trends away from dependency on single regions, notably China, towards nearshoring and the integration of automation and robotics. We provide a comprehensive look at how local and regional sourcing can ensure stability and enhance efficiency in the global market. If you're curious about the future of supply chains and how to stay ahead of potential disruptions, this episode offers a treasure trove of strategies and expert advice you won't want to miss.

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Chapters

• 0:05 Diversification Strategies in Supply Chain
• 6:09 Supply Chain Diversification and Resilience

Transcript

Tony Hines: 0:05

Hi, tony Hines. Here You're listening to the Chain Reaction Podcast, all about supply chain advantage. Well, I'm here today to talk about diversification strategies and we've got a great episode. We're going to look at every angle on diversification strategies to see whether it's something that your organization might do, is doing or may consider, and we also take apart the idea that this is a panacea, because it isn't. It's not a universal solution to everything and you'll see why as the episode develops. So stick around, stay tuned, stay informed. Chain Reaction.

Tony Hines: 0:41

In 2022, global trade hit 32 trillion US dollars and it's still growing. The trade relations that companies enter into are complex and multi-layered. So if we think about global trade expanding, that means there are lots of suppliers, lots of customers and some very big markets that need to be satisfied, and those goods come from all over the world and they travel thousands of miles to reach their destination. So, when it comes to getting hold of those goods, companies have to be smart in what they do. And in the past few years, with all the disruptions to supply chains, when we think about the pandemic few years with all the disruptions to supply chains, when we think about the pandemic, we think about the disruptions from container box, shortages, choke points around the globe, either made by people, as in the case of the Suez Canal blockage with the Ever Given ship, or whether it's a war in Ukraine or elsewhere in the world, or it's a volcano, a tsunami, or the Houthi attacks in the Red Sea, or terrorist acts, then there's a risk, whatever the disruption impact. That means there's a risk to those goods not getting to where they want to be. Now, when you try to balance out risk from any supply chain, it can bring cost into the supply chain, and that's not what we want to do.

Tony Hines: 2:11

We need to think about this in a bit more detail. So, for example, if we pursue strategies to lower risk which are focused, for example, on diversification and what I mean by diversification? In this sense, we might go for multiple sourcing strategies with multiple procurement deals, multiple suppliers. There might be complex arrangements and multi-layered tiers of suppliers too, but the idea of diversification is to spread the risk so that we don't become too reliant on a single source, a single supplier, and that makes sense. But there's a limit to what you can actually do, because if you diversify too much, of course you can incur an enormous amount of cost, and the other thing is that there's a basic assumption built into the principle of diversification that we can of course, diverse away risk completely, and that's false. And in some cases it's not easy to do just to mitigate risk, especially if we're reliant on a particular supplier for a particular quality, a particular material, a particular standard of production, then it isn't as straightforward as it might first appear.

Tony Hines: 3:21

Now let's think about what most organisations do. They procure and source materials for products that they make or for goods that they retail. And if you think about this from a market perspective, from the customer's point of view, then they'll probably have some awareness of demand from customers and past track records and what demand patterns look like for the products that they make or retail. And they'll also have some understanding from their supplier base of the capabilities of suppliers, which ones can manufacture goods that would meet the specifications of what they want to make and sell. So on the one hand, we've got suppliers, we've got an idea and a bit more than an idea, perhaps. We've got suppliers, we've got an idea and a bit more than an idea, perhaps a design or a specification for a product or product group that we want to acquire, procure, and so if we think about this. That's two pieces of the puzzle that are solved.

Tony Hines: 4:17

Then we need to look at suppliers who can supply us with those goods to the specifications, meeting the standards, meeting our quality expectations and also those of the customer. There'll be other constraints too, such as time periods in which we want to acquire the goods, procure those goods. So what's the time period we want to get hold of those goods? That's a consideration. Time is very important in this whole process of managing risk. After all, time delays are part of those risks.

Tony Hines: 4:48

Now, if suppliers are unable to supply in good time or to meet a specification, that of course creates a problem not just for us as the procuring company, but also for our customers. And with our customers we want to maintain a relationship, build the brand and we want to be first choice as their supplier. So we want to ensure that they get the best service from our organization. But we have to balance that against cost and the risks involved. It would damage our reputation and our brand if we don't meet the customer requirements in the time period specified. So how do we overcome this? Well, quite often we have a number of suppliers that can make the same goods to the same standard, and that gives us some form of diversification, some kind of spread of that risk.

Tony Hines: 5:36

But of course, there's a limit to this. First of all, we can't always necessarily have a diversification of suppliers. It may not always be possible and there's a limit to how many we can actually deal with. It may not be sensible to have more than a certain number of suppliers at any point in time, because there are costs associated with having suppliers on the list, because we have to serve those suppliers just as we have to serve customers, and we'll talk about that in a little more detail as we move on Now.

Tony Hines: 6:09

Something else to think about, of course, is the fact that there might be other constraints in the system Not immediately, but they might happen later. There might be disruptions to our supply chains. Supply chains at a distance are often complex and they involve a number of links in the chain, and at each point in that chain things can go wrong. They don't necessarily go smoothly, as we know. There could be disruptions at ports, there might be physical disasters that cause road erosion or transport difficulties on land, there might be volcanic eruptions, there might be wars that break out in the region we're sourcing from, or acts of terrorism. So, when it comes to diversification, it isn't really just about diversification. It's about another D data. It's having data so that we can understand what's actually happening in our global supply chain. And here's what Bindia Vakil told me when I discussed this with her. Bindiya is the CEO at Resilink and they look at risk all the time.

Bindiya Vakil: 7:10

Every company in the world today, whether they realize it or not, they have a global supply chain. But they look for expensive mitigation strategies like holding inventory or reshoring factories when data can make a massive financial impact to improving their resilience. But the challenge was getting to that data. It requires a lot of influencing of suppliers, collaboration, building trust, and I felt like I had learned a lot about how to do it successfully, and so I started Resilink to help other companies kind of embrace resilience, this type of practice.

Tony Hines: 7:49

So, if we think about understanding risk, we need the data to do that. We have to know what's going on in the supply areas that we deal with, in world trade, in those global supply chains and, of course, in those global transport systems that bring goods to our organization and to our customers, and so the data is the key to unlock protection, to mitigate risk. Now, I think another important thing to understand in this area is it isn't always possible to actually keep all this in one person's mind or even amongst a small team. It needs data fed into systems where perhaps artificial intelligence can make sense of what's going on much quicker than we can as human beings. And the thing about artificial intelligence fortunately it works while we're asleep, and so if there's a particular incident that takes place during the time that we're off duty, the AI doesn't stop, it continues and it'll take steps to protect the supply chain when necessary. And we'll say more about that in a special episode looking at how artificial intelligence helps supply chains, where I talk to Madhu Hosegara, who is the Vice President of AI Internal Offers for Snyder Electric. Snyder are a Fortune 500 company and they operate in 100 countries around the globe and they employ 168,000 people, so when it comes to AI, they're using it already to mitigate risk and to achieve sustainable products. Now, there's been a lot of talk about supply chain resilience over the past couple of years, and obviously President Biden made it a priority with the Inflation Reduction Act, and so lots of effort has been put into making supply chains resilient. In order to mitigate risk, 62 percent of organizations have made significant changes to the supplier base and 57 percent have established new operations in one or more additional countries, while 53% have near or resured operations. That's according to DHL, in a survey that they conducted.

Tony Hines: 10:00

When it comes to multiple suppliers, it's about spreading risk. It's about diversifying, having suppliers available so that if one supplier fails, another one steps up to the mark, and multi-sourcing strategies have long been part of a manufacturing company's strategic approach. Where possible, often it means adding new domestic, regional or global suppliers to the network of suppliers that you source products from. Multi-sharing, on the other hand, means that we look at the geography of our supply chains and decide to minimize risk, perhaps on a regional basis. Look at the regions where you've got suppliers and think about what could happen if there's a choke point from goods traveling from that particular region to where you want the goods to be delivered. So you have to think much wider than just the suppliers themselves, and obviously providers of 3PL services and 4PL services will also be able to assist when it comes to making good decisions about transportation choices and the logistics involved. You have to think about where they're located and you have to think about the routes to your markets, and this comes back to sourcing materials, components and everything else that you need for the organisation, and many have switched away from China in the past couple of years and spread around other parts of Asia. When we look at things like the Apple iPhone and the component parts that go into them, and microchip manufacture or component parts for electronic goods, companies have switched to other countries away from China, such as Vietnam, india and elsewhere, and this is about reducing reliance on one centre of operation. When we talk about China, of course China is a very large country, so spreading the risk perhaps it's already spread in some senses by being in different parts of the country. So you have to be careful about the decisions that you make. These are complex decisions.

Tony Hines: 11:59

A survey by ABB found that 70% of US businesses in 2022 were looking to bring production closer to home, and 43% said they used automation and robotics to build supply chain resilience. It's also been reported that textile companies in Europe are exploiting production sites around the continent and in the Middle East and North Africa, so on near shores to Europe. That's almost turning the clock back, perhaps 20 or 30 years in this case, to look for those sources that are near shore that have occurred, with things like the Suez Canal disruption, the disruptions in Panama, the disruptions by the Houthi, attacks on the Red Sea and other events, natural events, natural disasters, climate change, disasters that have caused disruptions to global supply chains. But the one thing is certain global trade hasn't peaked. It's continuing to rise. As we said at the start of this program, in 2022 it was over 32 trillion us dollars and it's still growing.

Tony Hines: 13:19

Supply chain diversification strategies are an approach that involve expanding sourcing options and optimizing procurement timing, with the purpose to enhance the efficient flow of products into the market, and we mustn't lose sight of that. Why do we have supply chain diversification? Well, it's all about resilience and agility. It's how companies can employ supply chain diversification strategies to enhance resilience and develop more agile business operations. It's an attempt to mitigate risk. By relying on multiple suppliers, multiple locations, business can reduce risk associated with disruptions, the sort of disruptions that we've talked about natural disasters, geopolitical events or supplier issues. They can also optimize cost. Diversification can lead to better cost management and improve negotiation power with suppliers. What specific strategies are we talking about here? Well, we've mentioned a few already, but here's a summary to recap Working with multiple suppliers for supplies, production and services.

Tony Hines: 14:37

For example, fashion companies spread their supply chains across the globe and they source product from many different facilities in Asia, in Europe, on home territory and elsewhere. So they'll go to a particular location based on the supplier's capabilities, the products that they actually want, the costs that they can achieve, and they're looking to optimize a balanced sourcing strategy. Diversification can also be achieved by holding higher inventories to buffer against supply chain disruptions, but of course, that costs and you can't hold stock everywhere. So what people and businesses actually will work on is moving stock around, looking at forward orders from the marketplace to see where it's most needed, and they'll make sure they've got enough stock in each of the locations to serve the markets. Regional sourcing is something else that's been more of a focus in recent times. Many companies have attempted to change the location of where they source from and they don't want to be dependent on one particular region or area of the world for obvious reasons, some of the things we've already mentioned. But again, the cost equation will shift when you had lower cost product but you might have taken on a higher risk because of the likelihood of disruption, you might now be switching to take on a higher cost but lowering the risk from disruption, and it's about getting those judgment calls correct. Companies also work in joint venture arrangements with suppliers, building relationships to bind them together so that the supplier is part an extension, if you like of the sourcing organisation, and that happens quite a bit in complex markets.

Tony Hines: 16:28

There are many challenges in this arrangement of diversification. There are complex cost models and the calculations have to be carefully worked through to see the benefits and additional costs and additional risks in a trade-off situation, how it's going to work in practice. There might be impacts on cash flow. There might be impacts on the credit risk involved and I recently had a conversation with Josh Simon, who is the Global Risk and Receivables Manager for JAS worldwide, and he told me how important it was to ensure that people that they dealt with could pay their bills and how to find out reasons why there were delays, if delays occurred and so on, and you can listen to that full episode with Josh where he talks about evaluating those sorts of risks and the impact it has on cash flow.

Tony Hines: 17:24

Payment terms may differ for new businesses, new vendors, affecting net payment days and cash flow muddling. Distributing volumes across multiple vendors may impact volume discounts, of course, whereas if you deal with one organisation, you might get really high discounts to order goods from one supplier. But the risks of that are obviously greater in some instances and therefore people like to spread that risk and they'll lose a bit of discount on their procurement. And of course, there's freight costs. Different shipping methods, distances across suppliers, distances to market and likely disruptions in regional arrays and regional geographies can all influence the way in which diversification is enacted.

Tony Hines: 18:16

My question is does it always work as expected? Well, while we argue that supply chain diversification enhances resilience and may mitigate risk, the downside is it can increase the complexity, increase costs and increase working capital, and the additional diversification doesn't necessarily guarantee immunity from all disruptions. So while supply chain diversification is critical for organizations, the analysis of the reasons why you are diversifying have to be carefully measured and the financial impact has to be assessed accurately. Well, that's it for this week. I hope you've enjoyed the episode on diversification strategies and remember it's not a panacea, as we said right at the start of the episode, but it is a useful tool to think about diversification to mitigate risk. But you have to be careful to calculate with accuracy the balance of those risks, and so that's my word of caution.

Tony Hines: 19:30

So don't just grab because everybody else is looking at diversification. Do it in a measured way, measure it carefully, forecast your results or possible outcomes accurately and, above all, get that data. Concentrate on getting the data that will help you assess the risk as best you can and optimize the variables, particularly cost and risk. So I'll see you next time in the chain reaction podcast when we'll have another episode discussing a critical topic of importance to everybody working in supply chains. Until then, i'm'm Tony Hines. I'm signing off. Bye for now, thank you.