The 4 Dimensions of Supply Chain Diversification

Complex global supply chains with a multitude of players on the one hand, and constant challenges to the agility and resilience of supply chains on the other. In this situation, many companies are seeking ways to reduce dependencies by diversifying their supply chains. The 4 Dimensions model from the new DHL Trend Report “Supply Chain Diversification“ offers a targeted approach to this challenge.

Resilience for Globalized Supply Chains

Volatility, disturbances, interruptions – the crises of the past, present and future are putting a strain on supply chains. Many companies have recognized that dependence on a single country, a single trade route, or a single source of supply increases the risks to their supply chains.

Diversification implies a departure from linear supply chain concepts. While diversifying the supply chain may not be a strategic imperative for every enterprise, companies that rely on logistics services should periodically conduct a strategic review of their current supply chain to assess the existing risk situation and decide whether changes are necessary.

DHL‘s 4 Dimensions Model

DHL‘s new multi-dimensional model of supply chain diversification supports this evaluation as well as the design of tactical and strategic scenarios. It reflects the complexity and versatility of supply chains and can be applied to specific product supply chains, complete supply chain networks, and entire business units or markets.

After all, every supply chain is unique, and its diversification can range from simple adjustments to individual links to comprehensive reconfigurations of entire global networks. The 4 dimensions of the model have been developed to deliver a tailored approach. Each dimension can be scaled up or down to assess the current level of diversification and, if necessary, define the desired level.

Dimension 1: Multi-Shoring

The first dimension is geographic diversification. Multi-shoring refers primarily to the creation of redundant production capacity or the establishment of additional supplier locations in mutually independent regions. This can be done by adding locations in other countries or continents to reduce operational, compliance or reputation risks.

Multi-shoring does not necessarily involve additional suppliers, but may require additional locations of the same supplier, for instance by sourcing the same product from two different plants.

The spectrum of multi-shoring diversification ranges from a moderately complex supply network limited to one country to a highly complex network spanning multiple countries or even continents.

Dimension 2: Multi-Sourcing

Multi-sourcing in the production and supplier network is less about geographic diversification but rather about quantity. The most common approach to multi-sourcing is the integration of redundant suppliers into the network. The integration of additional production capacity is also a common practice.

Diversification through multi-sourcing can happen on a local or regional level, for example by adding a new supplier in the same region, or on an international level. The main purpose of multi-sourcing is to reduce financial or operational risks, such as those resulting from a supplier’s inability to deliver on time or at all.

The spectrum of multi-sourcing diversification ranges from a moderately complex supply network with only one supplier to a highly complex network with multiple suppliers at multiple levels for each individual part or product.

Dimension 3: Modes of Transport

This dimension of diversification refers to the physical flow of goods and the use of multiple modes of transport to move a specific product or component.

The modes of transport in logistics are air, sea, rail, and road freight. Adding at least one mode of transport to any link in the supply chain (first mile, long distance, last mile, etc.) will diversify the supply chain. At the same time, using different modes of transport or multimodal solutions typically also diversifies transport routes, which can reduce operational risk and smooth out fluctuation in demand.

In a strategic diversification approach, adding modes of transport is not a contingency plan, but the proactive provision of a parallel transport method for the same route. It should be noted that different means of transport have different lead times that need to be aligned with the business model.

The spectrum of transport mode diversification ranges from moderately complex transport with only one transport mode for each individual part or product to highly complex delivery operations with parallel transport modes for each individual part or product.

Dimension 4: Logistics Operations

The fourth dimension of supply chain diversification is the expansion of logistics capacity. This means extending the logistics infrastructure with additional hubs, warehouses, or distribution centers.

This may include needs-oriented, redundant logistics capacity in other regional or global locations. Diversifying logistics operations may also involve outsourcing certain logistics activities.

Similar to multi-shoring and multi-sourcing, diversified logistics operations provide alternative options for maintaining supply chain continuity in the event of disruptions.

The spectrum of logistics operations diversification ranges from moderately complex logistics processes with only one logistics operation for a specific requirement to highly complex processes with multiple redundancy in different regions.

The 4 Dimensions in Practice

What do these theoretical concepts mean in practice? A selection of real-world examples highlights the importance of each of these 4 dimensions. The far-reaching potential of supply chain diversification is illustrated by how companies are implementing diversification strategies to sustainably improve their resilience, customer focus, and market responsiveness.

Multi-Shoring Examples (Dimension 1)

• Volkswagen: For the production of components for electric vehicles, VW is building factories in strategic locations in key markets in Europe and North America to respond quickly to market demands, optimize costs, and meet sustainability goals.
• LEGO: The LEGO Group is investing in a new factory in Virginia, USA, its seventh in the world. LEGO aims to build factories close to its largest markets to shorten transport distances, respond quickly to changes in consumer demand, and reduce its carbon footprint.
• Technology sector: Hewlett Packard is moving some of its laptop production from China to Thailand, Apple is relocating part of its capacity from China to India, and Foxconn to Vietnam. Dell plans to manufacture at least 20 percent of its laptops in Vietnam this year. This diversification strategy, which reduces dependence on China, is known as the “China+1” strategy. The strategic decisions also offer proximity to a broad and attractive customer base as well as access to a large and skilled workforce.

Multi-Sourcing Examples (Dimension 2)

• Fashion industry: One of the world’s largest fashion companies uses multi-sourcing on a global scale. The company strategically distributes its supply chain across thousands of locations and direct suppliers worldwide. This strategy allows the company to respond quickly to peaks in customer demand and leverage the individual strengths of each supplier. Having multiple suppliers also improves the company’s ability to react promptly to disruptions and redistribute production to ensure products are always in stock.
• Mechanical and plant engineering: The world’s leading manufacturer of elevators and escalators purchases the same materials from multiple suppliers to ensure consistent product availability and to adapt quickly and flexibly to market demands.

Examples of Parallel Modes of Transport (Dimension 3)

• Technology sector: A global technology company combines air freight for urgent shipments, sea freight for build-to-stock shipments and bulky items, and fast ocean freight services from China to the U.S. (14-day transit time), the latter with the option to send express shipments by air when needed. Multiple modes of transport increase market flexibility, improve responsiveness, control costs, and reduce emissions.
• Life sciences and healthcare: In addition to air freight, which is often indispensable, a leading pharmaceutical company is increasingly using sea and road freight to cut costs and minimize emissions. This diversification allows the company to quickly adjust to market demands. For example, the growing demand for biopharmaceuticals has led to more small-volume and temperature-sensitive shipments. In response, the company has expanded its supply chains to include temperature-controlled options.

Examples of Redundant Logistics Processes (Dimension 4)

• Sports equipment: A global manufacturer of sports apparel and equipment is shifting from a centralized to a decentralized and diversified logistics network. The company delivers its products directly from manufacturing sites to regional and local warehouses. In this process, the company has also expanded its logistics presence. The goal of this supply chain strategy is to improve resilience and profitability.
• Mechanical and plant engineering: A European elevator manufacturer pursues a similar logistics diversification strategy, but at a regional level. It assembles several parts of its end products in different distribution centers in different regions. Spare parts are stored primarily in local distribution and customer service centers in each country. This ensures that important products can be repaired quickly when needed. Finished products are shipped directly from the manufacturing plants to the customer centers to maintain customer focus and flexibility.

Steps to Create Your Own Diversification Strategy

The first step is to analyze the status quo. This requires transparency across the entire supply chain for every dimension: end-to-end mapping of the supply chain with all relevant suppliers and partners, as well as the physical flow of goods.

The next step is to determine the degree of diversification required for your business and to compare it to the current situation. If there is a discrepancy, the necessary resources must be identified to decide on the appropriate strategy.