Last week, I shared a post on LinkedIn that discussed the need to improve resiliency in businesses and supply chains. I mentioned in my post that I share two main strategies with my clients who are interested in improving resiliency. The first is transformative innovation which offers the possibility of improving resiliency with no impact on efficiency or an even more enticing possibility, improving both at the same time. This article, however, will be focused on the second strategy which is simpler and easier to implement for most businesses: supplier and customer diversification.
The main concern associated with improving resiliency is the risk of reductions in efficiency. While it’s true that resiliency and efficiency are often negatively correlated meaning one gets worse when the other gets better, that’s not always the case. Even when it is the case, there are usually ways to mitigate that impact…that’s what we’ll be discussing here.
Efficiency driven businesses are always looking for opportunities to improve productivity and reduce cost. This often results in those businesses pursuing relationships with fewer suppliers to maximize volume discounts. Big or medium sized business and even cooperative groups of smaller producers can often squeeze discounts out of suppliers. The bigger the volumes, the bigger the discounts, so if they can buy all of their needs from one source, they can often get the best price.
When we’re looking to improve resiliency, however, this can be a disadvantage. This means that we are heavily reliant on that one supplier and their supply chains to meet our needs. When we have disruptions to the supply chains like those created by African Swine Fever and COVID-19, we have few options if our supplier is deeply affected.
For example, let’s say we’re a pork producer that buys replacement gilts directly from a genetics company. If we buy all of our gilts from one company, we’ll likely maximize our discounts through volume purchasing, but if that company has a disease outbreak or relevant borders are closed that disrupt their ability to deliver, we’re left completely without a source. We’ll probably reach out to other genetics companies for help but their product will be in demand and they’ll be focusing on helping out their current customers with whom they have existing obligations and established relationships.
If we decide instead to source genetics from two or even three genetics companies, we will have more options in the event there are disruptions. “But aren’t you simply trading efficiency for resiliency in this case?” you might ask. Yes, unless we can also leverage additional value out of those relationships. For example, our secondary or tertiary supplier might have resources or expertise that are useful to us such as technical support or research capabilities. If we work hard to utilize those expanded resources, we can at least offset some of our loses in efficiency.
Another way we can reduce that impact is buy seeking out products and services with complimentary characteristics. For example, we might choose a genetics product that has strengths where our main supplier has weaknesses. That could allow us to capture the value of different advantages that we might be able to leverage with different customers such as niche markets (more on that in a minute). So, we want to consider opportunities to expand our supplier relationships but when possible, we want to choose suppliers that have resources or other advantages that are different from and/or complimentary to those provided by our main supplier(s).
Lastly, we need to dig deep to clearly understand our own supply chains and those of our suppliers so we can look for diversity. Continuing with our genetics example, we might look for a secondary or tertiary supplier that has supply chains based in different geographical areas. If our main supplier is based in Canada, we might look for additional suppliers in the US that could provide gilts and semen even if the border closes. Even within the US, we might want to pursue suppliers with different geographical footprints to reduce the chances that a regional disease outbreak, natural disaster or other unforeseen events will disrupt our entire supply.
Customer diversity is very similar to supplier diversity and many of the same concepts apply. Instead of creating resiliency in getting the things we need to create our product, we’re looking at creating resiliency in getting the things we’ve produced to buyers. Obviously, we have a great recent example of this in the US pork industry.
As COVID-19 heavily impacted packers, run rates declined and opportunities to market pigs became very limited very quickly. Pork producers had plenty of product and consumers wanted to buy it, but the disruption in processing presented an enormous obstacle.
The details of these disruptions will be studied for decades to come but it’s worth noting that the producers that were most intensely affected were producers that marketed a very high percentage of their pigs to one of the plants that was shut down or heavily impacted. The least affected producers were those that marketed their animals to plants that were largely unaffected. Nobody had any way to predict which plants would be affected, however, so there is not much we can do to pick the right customers in this type of situation. Sure, we want to work with packers that have solid production practices etc., but the big winners and losers were largely either lucky or unlucky.
That doesn’t mean we’re entirely at the mercy of luck, however, because some producers were able to minimize the impact on what might otherwise have been a disaster by diversifying customers. Just like with suppliers, it is tempting as a producer to sell as many of your hogs as possible to one customer as that usually maximizes your negotiating power and your ability to secure better prices for your product. Under normal circumstances, that will maximize revenue. When you have disruptions like COVID-19 or a fire at a plant, however, the value of diversification becomes quickly and painfully evident.
While we’re limited by geography to some degree (it’s not economically viable to ship market hogs thousands of miles), we can often find secondary and tertiary markets that are at a small disadvantage in location and/or offer additional value opportunities such as alternative markets (meat quality, RWA, group housing etc.). Large scale producers found during the COVID-19 crisis that even very small processors can offer some flexibility when times got really tough and they were trying to avoid having to euthanize market hogs. Some producers are working to develop strategies for maintaining those relationships with small processors in a mutually beneficial way that offers significant flexibility in the event of disruptions with minimal downside.
Certainly, there are limitations. Some producers have many options in their area and others have very limited options but almost all producers can develop some resiliency by diversifying the markets their pigs are shipped to. Even if there aren’t any obvious solutions, a little creativity can go a long way in creating options where they were seemingly limited.
I encourage all pork producers to think through these issues with their teams while the events of the recent past are fresh in everyone’s minds. I’ve cautioned the industry since the beginning of this COVID-19 debacle to not throw away efficiency that works 99 years out of 100 because of one pandemic, but we’d be crazy to not thoroughly evaluate ways to strategically improve resiliency while limiting the negative impact on efficiency. Diversification is not always the right answer, but it’s certainly something to seriously consider. If you need help finding the right balance, feel free to reach out to us at SwineTex Consulting Services for help.
About the Author: Todd Thurman is an International Swine Management Consultant and Founder of SwineTex Consulting Services, LLC. SwineTex is a US-Based provider of consulting and training services to the global pork industry. To learn more about SwineTex Consulting Services, send an email to firstname.lastname@example.org or visit the website at www.swinetex.com.