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.
Managing risk within the sourcing process
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We all know the risk management is one of the most important aspects of supply chain. The impact of failing to capture risk and then mitigate it can be uncomfortable at best and kill companies at worst. There are many facets to managing risk effectively as it can come from many areas within the supply chain. One of those key areas is within the sourcing process.
Resultant issues caused by the sourcing process can not only cost organizations the obvious financial penalties but also damage brands (and career prospects!!). If that isn’t bad enough failing to identify risk during sourcing can result in supply chain volatility and disruption across the supply network. As such it’s vital that risk is taken into account during sourcing activities.
While risk management is a fairly simple concept in execution it can be highly complex with many variables to consider. However, the basics of the risk management process is a tried and tested technique with a methodical process that once people have been trained in can be easily deployed.
From my experience, part of the problem is that within the sourcing activity it is not something that should be looked at during the start or the end of the process but should be an ongoing continuous process.
In many businesses, suppliers tend to be vetted once at the point of sourcing and then left alone to their own devices, this can leave the buying organization exposed to issues that arise later on.
The benefit of a procurement risk management process
The key, of course, is having a risk management process that is firmly embedded within the supply chain process suite. Unfortunately, we supply chain professionals tend to focus on the sexy stuff like KPI’s, supplier selection and contracts methodology. Unfortunately, risk sometimes becomes an afterthought.
When looking at sourcing one of the obvious places to embed risk management is at the point of onboarding the supplier. At this stage, it’s vitally important that you have adequate monitoring and sufficient transparency so that stakeholders engaged in the sourcing process are aware of any risks and can cooperate in the mitigation process (this includes the suppliers themselves).
When you do have the right process in place, managing risk doesn’t have to be difficult, as we stated above the risk management process is well established and there are suitable checks that can be made which are specifically appropriate to supply chain.
Risk management requires mitigation effort and of course, not all suppliers are equal in terms of their criticality and for those supplying products that are easily resourced within the marketplace the business might prioritize resources to help manage suppliers which offer more critical expertise or specific niche products.
One of the key problems is that risk management in the sourcing process often gets undertaken at the outset of supplier onboarding and then doesn’t get touched again. However, where a significant length of time has gone by since onboarding, issues may have arisen that if not managed will go unchecked, this can often lead to disastrous consequences on what was thought to be secure sources of supply.
Ongoing business reviews offer the ideal opportunity to solve this problem and offer the right environment to review risks and mitigation activity as part of the ongoing relationship.
Of course, the risks associated with sourcing is just one aspect of supply chain risk and there can be many other facets to consider in areas like production planning, logistics, and operational areas these areas too will require similar capture and mitigation processes.
Have some thoughts on sourcing risks? We’d love to hear your comments in the section below.