Why There is a Need for Diversification in Manufacturing?



COVID-19 has made it essential for manufacturers to rethink product diversification

The last few months have seen the far-reaching impact of the COVID-19 pandemic across industries and geographies. It has caused a delay in resources and materials supply in manufacturing due to supply chain disruption. Now organizations are looking to build diversification strategies in response to uncertainties. One of the crucial factors for creating such strategies is to maintain a revenue stream and avoid unsurmountable cash flow difficulties. Undeniably, this would be the first time in manufacturing history when demand, supply and workforce availability have been affected globally, all at the same time,

This havoc in the industry has significantly been occurred as most manufacturers heavily rely on offshore production and overseas suppliers for raw materials.


Why Diversification Matters?

With unprecedented chaos created across manufacturing processes, manufacturers have been propelled to rethink and find out creative ways to continue operations. In a business ecosystem, diversification means branching out into other product categories, industries, or marketplaces. Being a diversified manufacturer defines that a company is involved in a wide range of industries and unrelated market segments. 

Being a diversified business, a manufacturer can witness a minimized risk of loss, preserve capital, and generate more ROI. For instance, if a company makes multiple investments and one investment performs poorly over a certain period and other investments may perform better over the same period it will significantly reduce the potential losses of the company’s investment portfolio from focusing all its capital under one type of investment.

Diversification can occur at the business level or at the corporate level. Business-level product diversification means expanding into a new segment of an industry that a company is already operating in. Conversely, corporate-level product diversification delineates expanding into a new industry that is beyond the scope of a company’s current business unit.

There are manifold reasons for a company to diversify. For example, diversification mitigates risks in the event of an industry downturn. It allows for more variety and options for products and services. If leveraged correctly, diversification provides an unprecedented boost to brand image and company profitability. By diversifying products or services, an organization can safeguard itself from competing companies. It means diversification strategy can be used as a protection layer.

Manufacturing companies that have already embraced a diversified strategy found themselves capable of mitigating the effects of the pandemic. For instance, amid the COVID-19 pandemic, the automotive sector has started producing urgently needed medical devices such as ventilators and other things while many tech companies producing PPE kits and other safety equipment.

While diversification helps companies to keep production lines up and running in times of low demand, diversifying products often requires changes to plant equipment. It needs organizations to spread their capital across different asset classes to minimize their overall investment risk.

So, as the pandemic forced firms to become more agile, companies that diversified have now been exposed to new markets. During this epidemic, many enterprises diversified their business into medical resource and hygiene product manufacturing that is still helping in navigating the crisis.