Ask an Underwriter: What can I do to increase my supply chain diversification?

A US-based home and garden CEO writes:

The last few years have been a wild ride, and it’s reinforced that we need more supply chain diversification! Honestly, relying so heavily on only a few suppliers feels like playing Russian roulette with our business.

I keep hearing about the importance of diversifying our supply chain, but it feels like such a massive undertaking.

Basically, I need a clear roadmap on how to make our supply chain more resilient in the face of issues like US tariffs. Can you help me understand:

• What are the most pressing reasons brands like ours need to think about diversifying their supply chains this year?
• What are some concrete, actionable steps we can take to start diversifying without completely upending our current operations?
• What are the potential financial implications that Wayflyer considers when a brand wants to diversify its sourcing?
• Are there any particular regions or strategies you've seen successful consumer brands adopt for diversification lately?

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Are many US businesses considering more supply chain diversification?

Worried about getting the right supply chain diversification in place for your business, to protect against major economic changes, such as the sudden introduction of US tariffs?

As we reported in our last edition, initial surveys found that around 26% of our customers are choosing to diversify their supply chains. These brands are shifting production from China to Vietnam, India, South America and the US.

More broadly, 40% of US businesses have already shifted or plan to shift sourcing away from China.

Similarly, 77% of businesses globally expect to increase the number of suppliers they work with over the next two years, while 55% are making significant changes to their suppliers for greater agility and responsiveness.

It’s a business decision coming from the top, with 71% of US CEOs saying they plan to alter their supply chain structure in the next 3–5 years (up from 54% a year prior).

And in calls with over 100 of our customers, diversifying supply chains is emerging as the most popular response to the impact of tariffs on apparel brands in particular.

In fact, for founders of more premium apparel brands, these economic changes may bring a competitive advantage.

One explains: "Tariffs might actually benefit us since Chinese-manufactured products could be taxed higher than European ones."

What should businesses know about supply chain diversification?

Robert Griffith, Credit Lead at Wayflyer, reviews financing applications from hundreds of businesses every month.

Here, he shares the most effective ways to diversify your supply chain, and most importantly, the impact it may have on your profit margins both in the short- and the long-term.

Why invest in supply chain diversification?

The most pressing reason brands are choosing to diversify their supply chain at the moment is to reduce the impact of US tariffs.

However, building a more developed supply chain will provide long-term future-proofing for your consumer brand by:

• Increasing your capacity to sell-through
• Adding flexibility to your working capital cycle via different payment terms
• Derisking your business against a force majeure event with a single supplier

How to approach supply chain diversification, step by step

1. Prioritise flexibility above all

Now, more than ever, brands need to embrace flexibility, especially when it comes to their supply chain diversification. Current US economic policy is resulting in a significant shakeup for brands.

While the impact is likely to be felt at a macro level, this doesn’t mean you as an owner or operator have to take things on the chin.

Ask yourself:

What are the 2-3 changes I can make to increase my supply chain diversification right now to enable my business to be more flexible to economic changes?

This may look like:

Sourcing multiple vendors in different regions, considering a mix of local and international partners, or negotiating more flexible minimum order quantities and lead times.

2. Rethink your relationships

Due to recent economic shakeups, such as the new US tariffs, new supply markets are rapidly opening, and old markets will want to compete to retain business. Within this volatile market, you have the opportunity to build new supplier relationships that may not have been available or viable just a few months ago.

Ask yourself:

Which regions are other brands in my industry already successfully using in their supply chain? Do I have US-based contacts I may have overlooked? Can I move even part of my supply chain towards a US supplier, if I can’t move it all? 

This may look like:

Using AI-powered sourcing solutions to try to find niche or specialized suppliers, exploring nearshoring options in Mexico or Central America, or gaining access to previous exclusive or fully-booked suppliers looking for new anchor clients.

How to minimize disruption when introducing supply chain diversification

1. Don’t rush – test first

The best approach here is to start small and play the long game. Reach out to potential suppliers and ask to run a test.

This is best done over time, with an eye to ensuring quality first, as not all manufacturers operate the same. You may experience teething issues with onboarding, even when using a reputable supplier.

2. If time is of the essence, focus on quality

Given the current global supply lines, many brands don’t have the luxury of a relaxed search process. If you fall into this category, more than anything else, you’ll need to demand quality every step of the way.

Price and payment terms (to a point) can be negotiated over the course of a relationship; but it’s less likely for quality to improve once a manufacturer puts their best work forward, so this element should be your initial be-all and end-all.

3. All brands should deepen their supply chain

Even brands that are not currently affected by recent changes like US tariffs should consider adding more depth to their supply chain. This is to future-proof their business with the flexibility we discussed above.

This is a process that’s best executed over time. For this reason, brands with lower exposure should also be looking at diversifying their supply chain, while it’s not a pressing matter – and they may take advantage of a changing supplier market.

The financial implications of supply chain diversification

1. Urgency increases the risk

Many of our customers wonder what we as underwriters may consider when they shift or diversify their suppliers. Well, firstly, we look at how badly the brand needs to change suppliers.

In general, immediate, unavoidable need is considered far more risky than a slow shift or adding of capacity. Being forced to change suppliers all at once could lead to a critical risk event for the business.

A brand needs to have a lot of elements work out during this process (finding a new supplier, making quick contact with them, confirming the quality, avoiding shipping delays) or it could put them in a difficult situation with customers.

While this can and will be done well by many brands on the first shot, we recognize there is an elevated level of risk involved here.

2. Expect a short-term outlay

Short-term, you will spend a good chunk of cash on supplier exercises that may not be fruitful. This is part of the game with supply chain diversification – expect to either go several rounds with a supplier or speak with multiple suppliers before finding a match.

Like many costs, this is a short-term outlay for a potential long-term benefit. The results of this process will be measured over a period of months and years. Improvements to margin and cashflow due to the better terms will take time to flush through your financial statements.

… But the benefits are worth it

Down the line, you may experience better overall unit economics, leading to higher profitability. It could free up room in your contribution margin to push harder on marketing spend to drive topline revenue.

Another benefit could be a more favorable working capital cycle due to better payment terms with suppliers.

Or, in most cases, it will simply mean building a more sturdy, resilient business model that can weather adverse macroeconomic conditions better than your competitors.