How to Avoid Common Pitfalls When Diversifying Supply Chains Outside of China

Long before COVID disrupted global supply chains or retailers struggled with excess inventories, companies have been looking to diversify their supply chains outside of China with increasing urgency. From automotive companies to consumer electronics and beyond, our firm has worked alongside some of the country's largest companies and fastest-growing startups to build more resilient supply chains. But we have also watched companies struggle in their diversification efforts.

For those looking to expand across Southeast Asia or enter a new low-cost market, the three most common obstacles below tend to determine whether a program meets its objectives — or stalls.

Pitfall One — Not Having a Diversification Strategy

Hundreds of companies approach our firm annually asking for help in establishing supply chains outside of China. The reasons cited often vary — tariffs, rising geopolitical risks, humanitarian concerns, and rapidly changing customer demands typically sit at the top of the list.

While we usually see common themes for why a company is exploring a new market, it is unfortunately rare for companies to have a well-defined ex-China sourcing strategy. The distinction matters. Determining whether a business is looking to avoid or mitigate tariff exposure or seeking to build more resilient supply chains comes with different requirements — and has its own measures for success.

Researching a new market is a key first step. Failing to translate that research into a comprehensive sourcing strategy is where most companies falter. To position the work for success, leadership should be able to clearly answer four questions before any supplier discovery begins.

These questions look simple. In practice, organizations frequently can't answer one or more of them with conviction — and that's the early warning sign. Without clear answers, the diversification program is being run on momentum and external pressure rather than on strategy. The results follow accordingly.

Pitfall Two — Having Unrealistic Expectations

Regardless of the specific strategic goals a business is looking to accomplish outside of China, companies must also be realistic about the projected ROI and the resources required to achieve those objectives.

Too often, companies view these new markets as a sort of lottery ticket — hoping to capture significant cost savings and increased supply chain resiliency with relative ease. The reality is that just because a business is new to sourcing from Vietnam, India, or Cambodia doesn't mean these markets are themselves new to exporting — or that they are "where China was thirty years ago."

China made a concerted effort at the governmental level over multiple decades to make international trade relatively frictionless. The business environment was highly transactional, with few suppliers turning down discussions of new business development. Infrastructure was world-class. Suppliers understood retailer requirements and customer demands. Labor was readily available and cheap.

Transitioning to other markets means contending with different operating realities. India is still working to overcome a legacy of bureaucratic red tape. Vietnam still struggles with its own infrastructure — its labor pool is roughly 8% of China's, physical plant capacity is strained, and many key components and raw materials still need to be sourced from China. Bangladesh faces ongoing worker-rights challenges, while Myanmar and Ethiopia contend with civil strife.

These market-specific challenges can certainly impact supply chain operations — but they are by no means insurmountable. The risk isn't the challenges themselves; it's that businesses underestimate them, overestimate ROI, or fail to account for the cost of managing supply chains in these markets.

A successful diversification strategy does not necessarily need to drive outsized cost savings or happen overnight. Its job is to protect a business in the event of a supply chain disruption — and provide increased flexibility over time.

When the strategic measure of success is defined correctly — protection and flexibility, not cost savings alone — the realistic expectations follow. When companies frame diversification as a cost play, the bar set by China's mature operating environment becomes the implicit comparison, and the new market loses by default.

Pitfall Three — Losing Focus and Not Committing to the Process

Businesses and supply chain leaders need to take a hard look at where supply chain diversification actually fits among their list of priorities. With logistics challenges, rising costs, demand fluctuations, and ESG concerns, executives and practitioners are constantly balancing today's challenges against tomorrow's preparation.

One would be hard-pressed to find anyone who does not believe supply chain resiliency is key to long-term success. But few are willing to pay for that resiliency — and many lose focus when diversification efforts take longer than anticipated.

This is the gap that quietly determines whether programs succeed or stall. Belief in resilience as a concept is universal. Willingness to absorb the cost and complexity of building it is far less common — and the moment a program runs longer than expected, organizational attention pulls back toward whatever's burning today.

To avoid losing momentum, companies need to take a long-term view of supply chain diversification and build broad-based internal buy-in before the work begins. As mentioned above, sourcing from China — while far from perfect — is in many ways easier than sourcing from most other low-cost countries. Any transition will come with anticipated and unforeseen challenges, and individuals along the value chain will feel the impact of this supply chain transformation.

Start small and build on success. Not every SKU in a product category needs to be dual-sourced. Production of critical SKUs doesn't need to be moved overnight or in full. There can certainly be a sense of urgency around diversification — too many businesses have been complacent for too long in mitigating supply chain risk — but diversification is a process. A marathon, not a sprint.