Supply Chain Diversification Will Be The Key To India’s Economic Growth | Opinion

In today's globalised economy, businesses across the world are interconnected and dependent on each other. Supply chains are the backbone of these businesses, enabling the efficient flow of goods and services from suppliers to manufacturers and ultimately to customers. The COVID-19 pandemic has shown that businesses with diversified supply chains were more resilient and better able to weather disruptions caused by lockdowns and other restrictions. Our Finance Minister, Nirmala Sitharaman, recently spoke about the prudency to spread out their supply chain rather than concentrating it in one market. Diversifying our supply chains can potentially avert risks such as geopolitical tensions, natural disasters and pandemics.

Indian companies, particularly those in the manufacturing sector, have traditionally relied heavily on China for sourcing raw materials, components, and finished goods. However, the pandemic-induced disruptions to global supply chains and the ongoing geopolitical tensions between India and China have highlighted the need for Indian companies to diversify their supply chains.

Diversifying supply chains involves reducing dependence on a single supplier or country by sourcing materials and components from multiple suppliers located in different regions. It is important to keep in mind that diversifying supply chains is likely to be expensive, challenging and time-consuming for a company. A single diversification strategy is unlikely to work across different sectors, however, the following factors must be considered when devising a suitable strategy:

1. Risk Appetite: Different companies in different sectors have different levels of risk appetite which may be dependent on their market position, profitability, regulatory ecosystem, and product/service offered to their customers.

2. Identifying objective of diversification: It is pertinent for any company to first determine what their objective is i.e., what are they trying to protect (either their product, access to markets or contracts).

3. Determining why: Once a company has identified what they are trying to protect, it is necessary to know why. For example, if the identified objective is to protect the manufactured product, it may be to protect against the increasing cost of procuring raw materials, increasing cost of labour etc.

4. Trade-Off: When making any decision, the trade-offs the company is forgoing must be identified to understand whether the diversification strategy chosen will mitigate the opportunity cost of any other possibilities.

5. Finances: Diversification is expensive. Understand the company’s capacity to absorb costs, or the ability to pass on certain costs to suppliers.

Like other industries, the pharmaceutical industry in India has had to reorient its supply chains to mitigate the impact of Covid-19. Disruptions to the supply chain have now become more frequent, with an increase in global conflicts, cyber-attacks and trade disputes. These threats exist because the manufacturers in the pharma industry deal with proprietary knowledge and manage international data flows. Trade disputes are widely used as a geo-political tool to reduce the flow of raw materials from one country to another. Although the pharma supply chains are globally diverse relative to other sectors, certain ingredients are usually sourced from a single country. This expectedly opens the doors for trade and data flows to be critical points for disruptions. Indian companies need to reduce the risk they operate with through diversifying their sourcing points for ingredients across different countries (preferably those closer to our borders to reduce overall diversification costs).

In addition to reducing risks, diversifying supply chains can also bring cost benefits to Indian companies. For example, sourcing from multiple suppliers may create competition, resulting in lower prices and better terms. This, in turn, can help Indian companies remain competitive in the global marketplace and reduce their production costs, ultimately leading to higher profitability. Diversifying supply chains also offers Indian companies the opportunity to explore new markets and expand their global footprint. By sourcing from suppliers in different regions, companies can gain access to new customers and markets, potentially boosting their revenue and growth prospects.

To effectively diversify their supply chains, Indian companies need to conduct a thorough analysis of their existing supply chains, identify potential risks and vulnerabilities, and develop a roadmap for diversification. This may involve identifying alternative suppliers in different regions, establishing long-term partnerships with suppliers, and investing in technology and infrastructure to streamline the sourcing process.

The COVID-19 pandemic has highlighted the need for Indian companies to diversify their supply chains. By reducing dependence on a single supplier or country, Indian companies can reduce their exposure to risks and disruptions, gain cost benefits, and expand their global footprint. As businesses become more interconnected and globalised, diversifying supply chains will become increasingly important for the success and resilience of Indian companies.