Everything needs a supply chain, even a diamond ring. An interesting article in today’s Wall Street Journal discusses steps Tiffany’s has taken to assure a supply of diamonds (Diamond Industry Makeover Sends Fifth Avenue to Africa, Oct 26 ). Diamond merchandise now accounts for 47% of Tiffany’s sales and the firm has taken various stabs at backward integration, buying piece of mines and cutting and polishing operations. The diagram below shows where Tiffany has made its investments:
The in-house unit Tiffany founded in 2002 to run these plants, Laurelton Diamonds, now employs 1,100 workers, or 14% of the company’s work force. It will supply more than 50% of Tiffany’s diamonds this year — up from 40% last year and none in 2003.
One of the more interesting moves has been an investment in Botswana (what the articles deems as being “among Africa’s least-corrupt countries”). Apparently Botswana is the largest producer of gem quality stones and is free from “conflict diamonds”. In recent years, the government has set aside part of production for firms that finish the stones in Botswana in order to capture more of the economic value from developing the nation’s resources. It so far has been a tough go. The factory has been open two years and still has cost way higher than other Tiffany facilities. It has also run into some labor-relation issues. However, the firm seems dedicated to seeing the project through.
This seems an interesting example of a firm increasing its level of vertical integration, which somewhat bucks the norm for most of today’s supply chains. The key difference here is that the resource is scarce and possibly getting scarcer relative to demand (ignoring hiccups like the current recession). The ability to do quality electronic assembly work has become more and more widespread and that argues for outsourcing the work as opposed to doing it in-house. However, there are only so many sources of diamonds and reaching back to make sure that one has a steady supply seems appealing.