Supply chain diversification

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Supply chain diversification, within the context of manufacturing businesses, refers to the strategic approach of expanding sourcing options and optimizing procurement timing to facilitate the efficient flow of products into the market. It encompasses the breadth and adaptability of suppliers available for a particular product or component. However, the concept extends beyond mere supplier competition for favorable pricing, emphasizing the creation of a supple supply chain capable of responding adeptly to dynamic market conditions.

Supply chain diversification entails more than the mere presence of multiple suppliers; it necessitates that these suppliers offer comparable or interchangeable products while maintaining distinct competitive advantages that are situationally exclusive. For instance, consider two suppliers, Alpha and Beta, both providing identical sprockets. Alpha prices each sprocket at $1.00, ensuring delivery within 24 hours. Meanwhile, Beta offers the same sprocket for $0.25 but requires a two-week delivery period. The decision-making process hinges on a trade-off between cost and time considerations.

Ultimately, the goal of supply chain diversification is to strike a balance between sourcing options, risk mitigation, and operational agility. This approach enables businesses to navigate challenges while optimizing procurement strategies for enhanced performance in a dynamic marketplace.

In diversifying the supply chain for a product, it is also necessary to assist and educate the suppliers on what one expects from the suppliers and what one intends to do with the supplies. It becomes important to maintain an open line of communication with all the suppliers, and this in turn will increase the overhead necessary to maintain the managers/reps for each supplier. To minimize the overhead involved, method of developing a relationship with their suppliers such as RFPs and taking bids on jobs can be utilized.

When doing business with multiple companies, such is the case here, it may become necessary to standardize paperwork – such as RFQs, and purchase orders. As price fixing is illegal in countries such as the United States, traceable paper trail management becomes a legal obligation for companies seeking supply chain diversification.

In the International market, import and export regulations may become a hurdle for finding the right suppliers to diversify ones supply chain. This is especially true for US businesses after 9/11. The US customs department has enacted new regulations such as C-TPAT to encourage trade. The extra time and money spent on certifying a supplier for regulations like C-TPAT is another trade-off that management must consider when diversifying their supply chain.

Legacy suppliers

When diversifying your supply chain, the question arises, "What do we do with our old suppliers?"

Because supply chain diversification cannot occur overnight, the legacy supplier must be involved throughout the transition phase. In most cases, the legacy supplier will remain as the primary supplier even after diversification, as there is usually good reason that they became the original supplier.

The most common cases of the original suppliers being phased out after diversification is when supplies were being provided in-house or the material provided by that supplier has become obsolete. This is usually not the case with third-party suppliers, as the market drives them to stay competitive.

As with any new supplier, communicating with the legacy suppliers of the new direction of one's company is important for a smooth transition. At first, legacy suppliers may be apprehensive about the diversification, as it brings competition to an otherwise dominated market. That is why it is important that each supplier is distinguished from one another and they are not in direct competition with each other. Otherwise, diversification may cause duplicated efforts, extra costs, and non-cooperation that the price savings may not be able to justify.

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<span class="mw-page-title-main">Natural monopoly</span> Concept in economics

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Specifically, an industry is a natural monopoly if the total cost of one firm, producing the total output, is lower than the total cost of two or more firms producing the entire production. In that case, it is very probable that a company (monopoly) or minimal number of companies (oligopoly) will form, providing all or most relevant products and/or services. This frequently occurs in industries where capital costs predominate, creating large economies of scale about the size of the market; examples include public utilities such as water services, electricity, telecommunications, mail, etc. Natural monopolies were recognized as potential sources of market failure as early as the 19th century; John Stuart Mill advocated government regulation to make them serve the public good.

<span class="mw-page-title-main">Supply chain management</span> Management of the flow of goods and services

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<span class="mw-page-title-main">Supply chain</span> System involved in supplying a product or service to a consumer

A supply chain, sometimes expressed as a "supply-chain", is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods within the supply chain in the most efficient manner.

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In the United States, a group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.

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<span class="mw-page-title-main">Reverse auction</span>

A reverse auction is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction also known as a forward auction, buyers compete to obtain goods or services by offering increasingly higher prices. In contrast, in a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.

<span class="mw-page-title-main">Supply chain finance</span>

Supply chain financing is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf. Also it refers to the techniques and practices used by banks and other financial institutions to manage the capital invested into the supply chain and reduce risk for the parties involved.

<span class="mw-page-title-main">Ebidding</span>

An ‘‘‘electronic bidding system ‘‘‘ is an electronic bidding event according to defined negotiation rules (eAgreement). A buyer and two or more suppliers take part in this online event.

<span class="mw-page-title-main">Commission for Regulation of Utilities</span>

The Commission for Regulation of Utilities, formerly known as the Commission for Energy Regulation, is the Republic of Ireland's energy and water economic utility regulator.

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