How to improve your resilience and diversify your supply chain

Why should you diversify your supply chains?

Supplier diversification is crucial to help you reduce risks. The largest of these risks are by far the availability of goods and the stability of costs. Here's how diversification addresses them:

• Availability risk
  Relying on a small number of suppliers for critical products or materials can lead to shortages if that supplier’s production is disrupted or if a trade partner introduces trade restrictions. By working with a variety of suppliers and looking at suppliers in different regions, you reduce the risk of shortages and ensure a more stable supply of essential materials.
• Cost risk
  Supplier diversification reduces the risk of cost increases. When a business is overly reliant on a single supplier or a small number of them, factors like trade tariffs and shipping disruptions can significantly affect overall costs. By diversifying suppliers, you can avoid being overly impacted by temporary price hikes from one source, ensuring greater cost stability and flexibility in the face of unexpected challenges.

What are the costs and benefits of supply chain diversification?

Diversifying your supply chain helps reduce cost and availability risks. But ultimately, the greatest benefit is the predictability it brings to your supply chain, enabling more consistent operations and better long-term planning.

However, this reduction in risk does not usually come for free. Beyond the effort required to identify and evaluate new suppliers, diversification may increase your costs.

Diversification is a trade-off: having more suppliers can help stabilize overall cost fluctuations, but it may also mean moving beyond the low-hanging fruit. For example, you might need to source from more distant locations to work with a new supplier, leading to higher shipping costs and longer lead times.

How can supplier diversification help with trade uncertainty?

Supplier diversification can be a valuable strategy to mitigate trade uncertainty. When trade conditions with one country change suddenly because of tariffs, shifting regulations or trade agreements, having suppliers in different regions can help buffer your business from sudden disruptions.

Of course, it is always preferable to diversify sooner than later. Working with a number of suppliers before a crisis happens will enable you to pivot quickly in response to shifts, whereas waiting for disruptions will make it much more challenging: suppliers may already have contracts with their existing clients, and they may not be able to accommodate you on short notice.

How to choose new suppliers?

Finding new suppliers cannot be done overnight and requires preparation. You can follow the advice below to find new suppliers.

Make sure diversification is the best strategy for you

Before you begin searching for new suppliers, it’s important to evaluate whether diversification is really the best approach, especially if you're responding to a sudden crisis, like trade tensions. For instance, if a specific component of one of your products is impacted by a tariff, consider whether it's essential to your product's functionality.

“Sometimes, companies add extra features or 'bells and whistles' to their products,” says Éric Trudeau, Senior Consultant at BDC Advisory Services. “Evaluate if it’s worth the effort to find a new supplier, or if the feature is non-essential. Perhaps you could redesign the product to work without that particular component or even phase it out if it is not a core offering.”

Find new suppliers

• Research potential sourcing regions
  Start by identifying the countries or regions that are known for producing the specific product or material you need. Look into trade data, industry reports and export patterns to pinpoint regions with a strong track record of reliable production. Then, assess each region based on key criteria such as language, trade agreements, distance and ease of doing business. This will help you focus on the most promising areas.
• Identify potential suppliers
  Having targeted promising regions, start looking for specific companies. “Use trade directories, government offices and industry associations to build a list of potential suppliers,” suggests Trudeau. “Recommendations from business partners or industry contacts can also provide valuable leads.”
  
  Consider working with specialized consultants, who can not only help you find suppliers but also guide you through cultural differences and business practices when establishing new partnerships later on.
• Select the best suppliers
  Focus on suppliers with a solid reputation, proven experience in your sector, and the capacity to meet your quality and volume requirements. Check whether they have experience serving export markets, as this can ease logistics and reduce risks.
  
  You’ll want to be transparent from the outset by clearly explaining your business strategy, purchase volumes, and expectations regarding quality, costs, and delivery timelines. This will help foster a spirit of long-term collaboration.
  
  Finally, assess whether the supplier has the capacity and ambition to support your business as it grows.
• Test your new supplier and adapt your production
  Ask for product or material samples.
  
  “Do not order big batches right away,” advises William Polushin, Director, International Relations, BDC. “Start with smaller orders, and slowly increase volumes, making sure that quality is consistent in time.”
  
  At this point, your team may need to do some leg work. Your new supplier may not manufacture the product in the same way as other supliers, which means your production team will need to integrate this product into your processes.
  
  For instance, your new supplier may manufacture a metal component with 3D printing instead of milling, resulting in different tolerances or strength profiles. Or the new product may be made of a different material altogether, meaning you will need to paint it differently.

How to maintain good relationships with every supplier?

Once you've secured new suppliers, the next challenge is to cultivate strong, lasting relationships with each of them.

Start by maintaining open and regular communication, especially regarding your production calendar. Sharing your projected order volumes for the coming months will help your suppliers plan and improve their operational predictability.

Be mindful of cultural differences that can influence business relationships. In some regions, for example, your company’s president may be expected to communicate directly with the supplier’s top executive. Understanding these expectations can go a long way in building trust. Partnerships in countries like those in Asia or Latin America often require more nurturing, personal interactions and ongoing relationship-building.

“In the end, you have to be ready to engage in different business dynamics,” explains Polushin. “If you pivot towards diversification, you will reap the rewards, but you need to see it as an investment and think in years.”

BDC is here to help you

We are working with our partners at EDC, the Trade Commissioner Service, and other organizations across Canada to provide resources and support to business owners concerned about the impact of U.S. tariffs. We are monitoring the situation closely and continue to gather information to help your business.

Get reliable information and resources, and learn more about our support programs by visiting our page on the subject.