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Using Multi-Sourcing to Diversify the Supply Chain

Feb. 26, 2019
Long focused on forming long-term relationships with a pool of reliable vendors, more buyers are exploring the use of multi-sourcing to make sure their orders are covered. Here are the pros and cons of making this move.

There are different schools of thought on just how many suppliers a company should rely on for its raw materials, components, and even MRO (maintenance, repair, and operations) goods. Some feel that by working with a smaller pool of vendors over the long term—effectively “consolidating” their supplier bases—companies gain from better pricing, contract terms, customer service, and attention.

At the other end of the spectrum are the buyers who would rather work with a larger pool of vendors, betting that their organization’s needs will always be met if they “spread the wealth” among those various sellers.

Over time, most companies have settled for a strategy that falls midway between these two extremes: relying on a small pool of vendors, but augmenting it with other sellers who can “fill in” as needed. With tariffs, trade wars, and component shortages all taking a toll on the electronics supply chain, the multi-sourcing strategy could gain more traction as companies work to make sure they get the materials they need to make their own products.

“Today’s global supply chains are leaner and more dispersed than ever before, leaving them extremely vulnerable to operational risks and unpredictable disasters, both manmade and natural,” on-demand supply chain services provider IndustryStar points out in “5 Strategies to Protect Against Supply Chain Disruption.” “Developing an effective risk mitigation strategy against these inevitable threats is paramount to success in the global marketplace.”

By divvying up sourcing activities among multiple suppliers, the company continues, organizations can protect themselves against supply disruptions related to a single supplier. One way to protect against this is by developing a backup supply. “The idea is that a company identifies an acceptable supplier and enters into an agreement to reserve production capacity for a potential need during a disruption,” IndustryStar advises.

“This is like a diversified supply strategy, but different in one key aspect: It’s cheaper,” the company continues. “This is because cost is only incurred when the supply source is engaged during the disruption event.”

Placing Your Eggs in One Basket

In “Should You Choose a Single or Multiple Supplier Strategy?,” Dawson Consulting says companies that pursue a single-supplier strategy usually see the following wins:

  • Building and maintaining a relationship with one supplier is easier than with two or more;
  • Administrative and other costs are reduced when you place orders with just one supplier;
  • You can maximize volume leverage to attain attractive pricing;
  • It’s easier to streamline and integrate systems with a single supplier; and
  • You may be able to negotiate to receive small, frequent deliveries and so improve inventory control.

But there are also downsides to “placing all your eggs in one basket,” Dawson Consulting points out. Should your supplier experience a problem (i.e., a plant fire, major weather event, or financial setback), you may find yourself unable to keep your promises to your own customers. Among the other disadvantages: 

  • There is the possibility that potential customers will be concerned about risk to their supplies (if they become aware that you are single-sourcing).
  • It can be more difficult to ensure your company remains competitive if tied to single suppliers for multiple material/product categories.
  • Any general shortage in a single-sourced material or product might be a bigger issue than if you deal with two or more suppliers.
  • There is a risk that over time, the balance of dependence will become lopsided.

“The last point is particularly pertinent if your company is the one with the dependency,” Dawson Consulting adds. “For example, the supplier’s business may grow and take on more big customers, reducing the supplier’s dependence on your business. This introduces the risk of reduced service standards and perhaps even shortages or stock-outs.”

Seeking Alternatives

With the tariff wars challenging buyers right now, SupplyChainBrain says we live in a world where multi-sourcing has simply become smart business.

“Whether you are an OEM designing a product or an electronics manufacturing services (EMS) company building components for an OEM,” the publication states, “you are scrambling to put together your bill of material. You have to buy across multiple manufacturers to meet demand, and you have to know what alternatives you have for substituting one component for another.”

About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.

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