Pro’s and Con’s of Dual Sourcing in Procurement
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One of the classic conundrums that many Supply Chain’s face is whether to dual or single source particular inventory items. I’ve been in a variety of sessions over the years where with the illustrious use of hindsight dual sourcing would’ve saved the buying company large amounts of upset, but on the flip side, I have also witnessed its use reducing buying power, without addressing the issues it’s being utilized for.
Let’s get this straight from the beginning. Dual (Multiple) sourcing is one of THE most important tools in your procurement arsenal. It has many facets – risk management, negotiating power to name a few and bizarrely it tends to be one of the most overlooked tools.
But what is it?
The term single sourcing is used to describe where an inventory item is provided by one supplier. Dual sourcing as its name implies is where two suppliers provide an inventory item. Then there is a third option of multiple suppliers providing an inventory item.
As an example let’s look at ABC Manufacturing Ltd who supply the Aerospace industry. They procure a particular product from one supplier. This one product has a substantial lead time and is intricate to manufacture requiring a specific technical skill and tooling.
In this example, there is a level of risk associated that if anything happened with to the supplier (ie. it went out of business) there would be a significant impact on the buying company.
Usually, these complex parts are high cost with long lead times. As such many buyers look to consolidate the procurement, taking advantage of economies of scale (batch manufacture) often overlooking the potential risks of doing so.
Problems then emerge and the buying company is then adversely affected and due to a combination of lead time and complexity inventory deliveries are then substantially impacted.
This eggs in one basket approach has caught many a company out where problems with the vendor then emerge and the transition time to a new supplier can grind the buying business to a halt.
Of course this is an extreme example but unfortunately is an all too often common occurrence. Most procurement professionals will be well aware of an over-reliance on a single vendor and the problem is that this can cause, however, time and time again companies find themselves utilizing single source supply of critical items.
Clearly, a careful assessment is required to find the appropriate way forward, for most businesses this decision tends to be made at the point where an RFP is issued to prospective suppliers. (e.g. the volumes which are looking to be contracted). This is the point where the decision needs to be made and a fair assesment of the pro’s and con’s for that particular inventory item are made.
It must be remembered that Dual Sourcing is not without its issues some of which include:
* What would happen if one of the vendors failed (could the other pick up the slack)
* What are the possible risks associated with the inventory item (if these issues affect the market rather than a particular vendor i.e. availability of raw material, then the benefits of dual sourcing to reduce risk may not be clear cut.
* Reduction in possible spend leverage with vendor and affect on price
* Possible extra costs in terms of duplicate vendor tooling which could attract extra NRE
* Possible additional resources required to manage multiple vendors.
* Failure of dual sourcing to adequately manage risk
Do you utilize dual sourcing? We’d love to hear your stories in our comments section below.