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Thursday, May 23, 2024

Strengthening Supply Chains Through Supplier Diversification

Throughout the evolving socio-political landscape of recent years, a prevalent issue that governments and businesses have had to address is how to strengthen supply chains. Confronted with such a complex task involving thousands of suppliers, the United States has recognized that maintaining its strength requires more scrutiny regarding who supplies our country’s goods. Whether dealing with potentially hostile foreign governments or companies with significant market power, one key aspect to consider is diversification and minimizing reliance on single vendors.

Diversification protects the US against market volatility, from supply disruptions to potential war outbreaks. Having diverse suppliers enables the US to spread risk across various companies operating in different economies and social and political landscapes. Diversified supply chains are more likely to recover faster from supply disruptions and have a 30% lower risk of supply chain problems in the first place.

For example, Apple relied heavily on foreign suppliers to produce its technologies. Due to the potential for supply chain disruptions from geopolitical tensions between China and the US and past natural disasters in regions like Japan, Apple minimized its risk by moving from relying solely on one singular producer of its memory chips to securing contracts with several suppliers across different regions. As a result, Apple’s reliance on a single supplier decreased from 60% to 20%, significantly reducing its vulnerability. Additionally, Apple expanded its manufacturing footprint beyond China to other countries, including increasing production in places like India and Vietnam. In 2021, Apple’s production in India grew by 50%, while its manufacturing in Vietnam increased by 30%. This helped Apple gain more negotiating power and safeguard its supply chains against potential disruptions.

The consequences of undiversified supply chains can be seen throughout history, such as during the oil embargoes of the 1970s. The limited transportation of Arab petroleum to the US led to a lack of petroleum supply, causing the price of oil to more than double in 12 months, from $3 per barrel to over $12 per barrel. This burdened US citizens nationwide and inflated prices for goods and services. The inflation rate surged to 11% in 1974, up from 3.4% in 1972, highlighting the economic strain caused by supply chain vulnerabilities.

This highlights that it is pivotal for both the private and public sectors to adopt multi-sourcing approaches to navigate the complexities of global supply chains effectively. Diversification mitigates risks and enhances resilience, ensuring a more robust and reliable supply chain for the future.

author avatar
Cassian Persico Peña
Cassian Persico Peña is a multilingual businessman based in New York City. He works with both the public and private sectors, holding key positions such as Regional Director for Strategy & Development at Grupo Atlántida, Economic Analyst for the Federal Reserve National Competition, and Development Head for IN NETWORK: The National Security Academy. Cassian has obtained certifications in Finance, Business, and Law from prestigious institutions like Yale and The Wharton School of the University of Pennsylvania, among others.
Cassian Persico Peña
Cassian Persico Peña
Cassian Persico Peña is a multilingual businessman based in New York City. He works with both the public and private sectors, holding key positions such as Regional Director for Strategy & Development at Grupo Atlántida, Economic Analyst for the Federal Reserve National Competition, and Development Head for IN NETWORK: The National Security Academy. Cassian has obtained certifications in Finance, Business, and Law from prestigious institutions like Yale and The Wharton School of the University of Pennsylvania, among others.

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