Covid-19 has disrupted the supply chain by shutting down manufacturers and suppliers in China, the U.S., and elsewhere. This post suggests five ways to overcome this challenge.
Diversify suppliers. Diversification sounds easy, but finding an alternative manufacturer or distributor can be difficult depending on the product. An alternative outside of China for clothing or kitchen utensils is relatively easy. India, Peru, Bangladesh, Ecuador, and Turkey, as examples, have options.
But if a merchant imports electronics, the options outside of China (e.g., South Korea, Japan) will likely cost 150 percent more. Still, diversification can have unintended benefits, such as shorter shipping times, lower customs duties, and cheaper return and replacement costs.
Diversifying suppliers is similar to new-product sourcing with one exception: the merchant already has suppliers and will typically choose a different region to lower risk. Beyond geography, critical factors for selecting suppliers are price, quality, and lead time. Large merchants have volume requirements.
Sources for alternative suppliers include Amazon Business, Alibaba, and country-specific sites, such as IndiaMart. I addressed supplier options several years ago, at “20 Leading Global B2B Exchanges.”
Consultants can help, too, by researching a merchant’s requirements and assembling a shortlist of potential options.
Partner with diversified manufacturers and distributors. Covid-19 is hurting China-based manufacturers and distributors. Many are now planning to diversify outside of China themselves. Some have done this already due to the rising labor costs in China and the proximity to raw materials, thus opening facilities in India, Vietnam, and Cambodia, among other countries
For merchants, using a diversified supplier reduces the risk (and the effort) while shifting the responsibility of price, quality, and service to one company. Check with existing manufacturers and distributors as to whether they have diversified operations.
…using a diversified supplier reduces the risk (and the effort) while shifting the responsibility of price, quality, and service to one company.
Use tiered suppliers. Many larger merchants have tiers of suppliers. This is different from diversifying entirely, in that tier 2 and tier 3 options typically focus on a tactical replacement.
Say, for example, the product-packing unit for a tier 1 supplier stopped working. That could trigger a merchant to contact a nearby tier 2 supplier to use its packaging unit. Tiered suppliers must typically work on short notice. Thus a merchant cannot pick tiered suppliers that require an extended lead-time.
Substitute products. Another option for overcoming supply chain disruption is to launch new products. Start by analyzing customers’ purchase history and then choosing complementary or similar goods. For example, a merchant selling female clothing could sell handbags.
Hold excess inventory. Merchants usually avoid buying too much inventory. But a “just-in-time” strategy does not work when suppliers cannot ship the products. Even smaller merchants could benefit from investing in excess inventory (and warehouse space) to meet demand.