What's the best way to get the highest returns on your stock portfolio? Diversify, diversify, diversify! We've all heard this before. But why is that? According to Investopedia, "Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event."
Diversification lowers risk, by reducing your dependence on one category or industry to do well and reducing your exposure if any one sector or stock performs extremely badly.
Can this technique reduce risk for companies with global supply chains? Absolutely.
By sourcing from a variety of different suppliers, of different sizes, origins, and geographical locations, corporations can maximize their returns and benefit from the creative ways the companies in their supplier network react differently to the same event or economic changes. Internet juggernaut Google employs a 'geographic diversification' strategy in its site selection process for where it places new data centers. This strategy protects against the risk of any one manmade or natural disaster knocking out its entire network.
Dutch express mail company TNT continued business as usual during the 2010 Icelandic Volcanic Eruption event because it had a diverse transportation mode network and was able to quickly shift its transportation methods from air to ground and sea. Meanwhile, companies in the automobile, airline, floral and fresh produce industries suffered extreme losses due to this one natural disaster if they didn't have a diversity of suppliers around the world and/or a diversity of transportation methods to ship their critical parts and goods. Diversifying the types and sizes of companies in your supplier network also reduces risk. Rebirth Analytics and the Northwest Mountain Minority Supplier Development Council analyzed over 300 privately-held minority supplier firms representing $8.1 billion in gross revenue. The study found that minority firms were outperforming much larger firms and their publicly-traded and privately-held counterparts on metrics of financial health and resiliency. Financially health and resilient suppliers result in financially healthy and resilient supply chains. Supply chain risk can come in many forms: natural or manmade disaster, financial insolvency, political unrest, or a global pandemic. If supply chain risk threatens your business in any way, take a look at your supplier network and remember ...
Diversify, Diversify, Diversify!