Should you reduce supply chain risk through diversification?
Supply chain diversification is perpetually on the mind of most production managers. Not too surprising, considering how turbulent 2011 has been politically, economically and geologically. (Earthquakes and hurricanes, I’m talking to you.)
Where has all the red paint gone?
Why does supply chain diversification matter? Take Ford’s recent fiasco following the natural disaster in Japan. Because of the auto manufacturer’s reliance on a supplier affected by the tsunami, Ford was unable to source key pigments that went into the paint for certain models. That is why it’s much harder to buy “royal red,” “red candy, “red fire” or “tuxedo black” vehicles today, and why you should consider diversifying your supply chain.
Questions to ask before adding supply chain vendors
If you’re considering adding supply chain vendors to mitigate your overall supply chain risk, there are many aspects that must be considered before you take the leap. Ask yourself the following questions:
- Are you at a sufficiently stable point in your product life-cycle? (Can your current handle a disruption?)
- How will you manage your supplier relationships through the transition?
- Can you afford or somehow mitigate new supplier implementation costs?
- How will you cut the ties to suppliers you no longer care to work with?
- What is your internal/external process for change management? (Do you have one?)
A clear, smooth process for managing change is crucial
This last consideration is extremely important if you are diversifying your supply chain—what is your process for change management? This includes defining what changes matter, what requires an ECO, who signs off, etc., as well as implementing systems that allow you to effectively and quickly communicate changes with internal and external partners.
When adding more complexity to your supply chain, the ease of production is directly proportionate to the quality, depth and availability of your documentation, so make sure your processes for revision control and data-sharing are up to par. (And if you have questions, here are some articles on revision control.)
Diversification should not mean overproduction
If you’re moving ahead and adding supply chain partners, it’s also important to recognize that a diversified portfolio has more moving parts than a simple linear supply chain—because of this, managing inventory levels can be difficult. As you work with your various suppliers, keep in mind that excess inventory is a waste of both time and money. Make sure to keep your supply pipeline full, but don’t fall into the trap of over production.
Having tunnel vision in your manufacturing process can mean disaster for your product and company, so it’s good to be on the lookout for opportunities to diversify. Just be aware that diversifying increases your complexity as well as your operating and management costs upfront—so run cost analysis before diving in, and proceed with caution. Although a diverse supply chain takes an initial investment and adds complexity, if you are in a position to do it, it can really pay off in the long run.