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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.
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.
A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.
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.
In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, so that the raw materials can be converted into a finished product and delivered to the end customer. A more narrow definition of the supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.
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.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product to the end customer. The concept comes through business management and was first described by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
The idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing organization as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources – money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.
Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.
Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.
A purchase order, often abbreviated to PO, is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services required. It is used to control the purchasing of products and services from external suppliers. Purchase orders can be an essential part of enterprise resource planning system orders.
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.
Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional organisational purchasing activities to embrace all activities within the procurement cycle, from specification to receipt, payment for goods and services to sourcing production lines where the labor market would increase firms' ROI. Strategic sourcing processes aim for continuous improvement and re-evaluation of the purchasing activities of an organisation.
A purchasing cooperative is a type of cooperative arrangement, often among businesses, to agree to aggregate demand to get lower prices from selected suppliers. Retailers' cooperatives are a form of purchasing cooperative. Cooperatives are often used by government agencies to reduce costs of procurement. Purchasing Cooperatives are used frequently by governmental entities, since they are required to follow laws requiring competitive bidding above certain thresholds. In the United States, counties, municipalities, schools, colleges and universities in the majority of states can sign interlocal agreements or cooperative contracts that allow them to legally use contracts that were procured by another governmental entity. The National Association of State Procurement Officials (NASPO) reported increasing use of cooperative purchasing practices in its 2016 survey of state procurement.
Government procurement or public procurement is undertaken by the public authorities of the European Union (EU) and its member states in order to award contracts for public works and for the purchase of goods and services in accordance with principles derived from the Treaties of the European Union. Such procurement represents 13.6% of EU GDP as of 2018, and has been the subject of increasing European regulation since the 1970s because of its importance to the European single market.
Infor Nexus is an independent business unit of Infor LLC offering a multienterprise supply chain network. The on-demand global supply chain management platform and integrated applications are used worldwide by businesses to manage global direct procurement, supplier networks, global logistics and global trade processes. Founded in 1998, in Oakland, California, it merged with TradeCard in 2013, and in September 2015, GT Nexus was acquired by Infor. Today, Infor Nexus is a business unit of Infor.
Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material, extreme international competition, new technology and other economic factors like tax breaks and low trade tariffs. A large number of Information Technology projects and Services, including IS Applications and mobile phone apps and database services are outsourced globally to countries like India and Pakistan for more economical pricing.
Forward Commitment Procurement (FCP) is a procurement model that is designed to be used to deliver cost-effective environmental products and services to the public sector and help to create the market conditions in which the environmental goods and services sector can thrive.
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.
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.
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.
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.