%201.svg){kind=small}
Latest posts
Download resources
Risk diversification: definition & important aspects for buyers
.jpeg)
Risk diversification in a nutshell:
Risk diversification describes the systematic distribution of risks across several different options or sources to reduce the overall risk. In purchasing, this strategy makes it possible to hedge against delivery failures, price fluctuations and quality problems through targeted distribution across different suppliers, regions or procurement channels.
Example: An automotive manufacturer procures critical electronic components from three different suppliers (40%, 35%, 25% volume distribution) from different geographical regions, which means that during a production outage in Asia in 2023, the European and American suppliers were still able to cover 60% of demand.
Contents
What is risk diversification?
Risk diversification in purchasing refers to the strategic distribution of procurement risks by spreading purchasing activities across different suppliers, regions and products. A conscious effort is made not to be exclusively dependent on individual supplier management or markets. This distribution minimizes potential risks, such as supply bottlenecks, quality problems or price volatility, and ensures the company's security of supply.
Core elements of risk diversification in purchasing
Importance of risk diversification for purchasing
In the procurement process, risk diversification plays a crucial role in ensuring the continuity of business processes. By spreading risks, companies can react more quickly to unforeseen events and increase their resilience to market changes. This not only leads to a more stable supply chain, but also enables better negotiating positions with suppliers and can contribute to cost savings.
Risk diversification: from mono-procurement to global supplier diversity
Based on the theoretical foundation of risk diversification in procurement, it is essential to put this concept into practice in order to make supply chains more resilient. In today's globalized economy, unexpected events can cause supply shortages and have a significant impact on business operations. Therefore, there is an urgent need to move from traditional sourcing strategies to modern approaches that proactively spread and minimize risks.
Old: Mono-procurement
Traditional approach:
In traditional mono-procurement, companies concentrate on a few or even a single supplier selection for critical materials. This strategy offers short-term benefits such as closer business relationships, better discounts and simplified communication processes. Long-term contracts are often concluded and there is a high level of dependency on the selected suppliers. However, this concentration leads to considerable risks, such as delivery failures, quality problems or sudden price increases, to which the company is defenceless.
New: Strategic risk diversification
Risk Diversification:
The modern approach to strategic risk diversification in purchasing relies on the conscious spreading of procurement risks by working with a large number of suppliers across different regions. With the help of advanced analysis tools and data management, companies can identify potential risks at an early stage and adapt their supply chains accordingly. The integration of alternative materials and the development of flexible contracts enable a rapid response to market changes. This leads to increased security of supply, cost benefits through competition between suppliers and increased agility in procurement management.
Practical example: Implementation in the electronics industry
A leading manufacturer of electronic components was facing shortages of rare earths that were jeopardizing production. By introducing a risk diversification strategy, the company increased the number of its suppliers from 2 to 8 and sourced materials from different countries, including alternative markets in South America and Africa. Within one year, security of supply was increased by 35% and material costs were reduced by 12%. In addition, competition among suppliers led to improved payment terms and higher product quality.
Conclusion on risk diversification
Risk diversification in purchasing is an indispensable strategy for modern companies to ensure their security of supply and minimize dependencies. Through the targeted diversification of suppliers, regions and products, companies can significantly increase their resilience to market fluctuations and unforeseen events. Despite higher coordination costs, the advantages of a diversified procurement strategy outweigh the disadvantages, especially in times of increasing global uncertainty. Success lies in striking the right balance between risk diversification and operational efficiency.
