To Consolidate or to Diversify: The Key to Selecting the Best Supply Chain Strategy

Published On October 29, 2021 by ShakeDeal Staff

The unprecedented pandemic that put a sudden pause on the functioning of the economy, has left the supply chain severely disrupted. With the subsequent locking and unlocking of the cities, the business leaders are in a pickle to choose the right supply chain strategy for their business. It has also promoted the need for businesses to understand their supply chain in-depth, as without prior understanding of their supply chain model the decision cannot be taken.

Why is choosing the right supply chain so crucial?

Supply chain management is the process of organizing and coordinating various elements necessary to produce and deliver services or goods to the customers of the concerned business.  This includes monitoring the manufacturing process of the goods, determining the quality of the goods, shipment of the goods, and lastly delivery of the goods. Supply chain management is at the core of achieving various business objectives, and one wrong decision can crumble the entire chain.

In the wake of Covid-19, supply chains were completely disrupted. After the vicious blow, businesses have been working hard to stand strong. Here are the five areas to work on while handling supply chain disruption:

 1. Develop a functional procurement model and find novel effective ways to work with internal customers and the supplier ecosystem.

 2. Manage the uncertainties in the supply chain by procuring from all companies- small, medium, and large. This would prevent further disruption of the supply chain.

3. Minimize unnecessary expenses and loosen the funds wisely. Saving should be a priority!

4. Constantly update risk management strategies and maintain transparency in procurement.

5. Innovate ways to get through disruption. Find customer-centric and cost-effective ways to stabilize procurement.

The best way to design a tailor-made supply chain strategy is to take into consideration the following elements of business:

  • Planning
  • Source for procuring raw materials
  • Manufacturing Process
  • Delivery of the goods
  • Returns earned

Once the sourcing manager has answers to these questions, it is easier to decide on the type of outside service provider one needs for their successful business. Supply chain management offers the following benefits: improved customer management and satisfaction, and value for money. It also comes with challenges like vendor compliance, data storage, payment risk, and unpredictability. At the crossroad of supplier selection, one can choose to either consolidate or diversify their vendor base. Let’s understand both vendor consolidation and diversification

Vendor Consolidation

Vendor consolidation is a major cost-saving strategy that is used to rationalize the supplier base, meaning to reduce the supplier base by procuring all services from a limited set of suppliers.

Advantages of Vendor Consolidation

 

1. Limit Expenditure

As the company procures services from a limited number of suppliers, it saves on the money involved in accidental service duplication, unnecessary hand-offs, and customer contact. Vendor consolidation also provides the scope for effective price negotiation with the concerned supplier over bulk services.

2. Opportunity for Partnership

A company can enable a successful partnership with a supplier, this can only be feasible if the supplier count is limited. The partnership will ensure a successful ‘outcome-based outsourcing’ relationship.

3. Consistency

It is easier to manage a consolidated number of suppliers thus ensuring consistency and flow in the services procured.

4. Reduced Risk

Few suppliers always mitigate the risk associated with handling a large set of service providers.

Disadvantages of Vendor Consolidation

 

1. Lack of Freedom

With vendor consolidation, the company lacks the freedom to onboard multiple suppliers specializing in different services. This makes it difficult for the company to achieve maximum customer satisfaction.

2. Not Feasible for Small Businesses 

As while rationalizing the supply, companies tend to hire Tier 1 or Tier 2 service providers, which might not be affordable for small businesses.

3. Risk of Supply

As the company relies on few suppliers, it is difficult to fulfill customer requirements and meet their supplies on time.

Vendor Diversification

Vendor diversification can be defined as the strategy used by companies to procure goods and services from a wide supplier base. Similar to vendor consolidation, even diversification has its own share of pros and cons.

Advantages of Vendor Diversification

  • Resilience and Flexibility: The pandemic has proven the importance of having a wide and diversified supplier base, as it helps in procuring goods most effectively in the face of challenges and interruptions.
  • Competition: A healthy and managed competition between the vendors would promote the vendors to deliver benchmark customer services, further benefitting the company.
  • Freedom to choose: The company has absolute freedom to choose from multiple service providers for multiple tasks. The decision would be based on the budget and requirements of the task.

Disadvantages of Vendor Diversification

  • Vendor diversification comes at the cost of high expense and can be time-consuming.
  • Because of the divided attention and dull relationship with the vendors, their response at the time of need will be poor or none.
  • Having multiple suppliers comes with the con of sharing a company’s vital information with multiple people, which can be risky.

Consolidate or Diversify: Which way to go?

The supply chain strategy entirely depends on the company’s customer goals, history, culture, and finances. So, in conclusion, the decision depends on the type of business. However, during challenging times you might be required to alter and adjust your supply chain strategy. The pandemic has taught one important lesson, which is to have transparency in procurement, only then the risks can be effectively managed.

The supply chain strategy entirely depends on the company’s customer goals, history, culture, and finances. So, in conclusion, the decision depends on the type of business. However, during challenging times you might be required to alter and adjust your supply chain strategy. The pandemic has taught one important lesson, which is to have transparency in procurement, only then the risks can be effectively managed.

 

Also Read

Pin It on Pinterest

Share This