Dual sourcing can be an effective approach to reduce risks associated with purchasing from one supplier – mainly the possibility that that supplier suddenly takes advantage of your dependence on them and increases prices. While dual sourcing can help reduce this risk – now you have an alternative supplier that you can turn to – it also comes with costs. Now you need to negotiate and maintain two negotiations, deal with discrepancies in the quality, and potentially not have the purchasing volumes to negotiate as good price.
This article explores which components and materials it is particularly important to consider dual sourcing for.
Reasons to consider dual sourcing on a particular input
There are only a limited number of firms that you can turn to
One of the key reasons to consider dual sourcing is if there are only a small number of firms that are able to manufacture your components. If there are a large number, or the product is a commodity widely available, then the risks are substantially reduced – should you run into problems with this particular supplier then there are many others that you can turn to (and likely at least one will be able to accommodate your demands). Indeed, in such cases, your supplier will likely recognize that they don’t have the ability to push prices up, in turn reducing the likelihood of it occurring.
On the other hand, if there are only a few other possible firms, there is a greater risk associated with your supplier trying to substantially increase the prices of your contract. Establishing the option of another firm that you can turn to in advance helps reduce this risk.
It will take many months to establish a new supplier relationship
Another factor that can influence whether dual sourcing makes sense for a particular product is the difficulty involved in establishing a new supplier. If it a drawn-out process, taking many months, the power of your supplier increases. They can recognize that you are locked in with them for at least the foreseeable future, in turn allowing them to increase their prices knowing that you likely will have difficulty moving to a different firm.
The component is critical - impacting your entire operations
Another reason why it may be important to consider dual-sourcing is if the component is critical for your operations – a part that there is no substitute available and is involved in all of your products. The greater the importance of the component (and in turn the greater the impact should the supplier seek to increase prices), the greater likelihood dual sourcing should be considered.
The component represents a large proportion of your costs
For components that only represent a relatively small proportion of your costs, the impact of a supplier seeking to increase costs may not be that significant. At the worst, you could potentially accept the price increase while looking for alternative suppliers. On the other hand, if the parts represent a large proportion of your costs, then even a modest increase may have a significant impact on your profit margins. The greater the overall proportion of cost that the part represents, the more important keeping your options open through dual sourcing may be.
You don't have the ability to manufacturing the component internally
If you lack the ability to manufacture the part internally, then seeking an alternative supplier becomes more important. Maintaining some manufacturing in-house can provide a fallback should you run into supply issues. If you can confidently meet your needs internally should you need to, then the strategic importance of dual sourcing declines.
You don't have a long-term relationship wit the supplier, or they have suddenly increased prices before
The final reason to consider dual sourcing is that this particular supplier has tried increasing prices before. If you have a long-term relationship with a company and have had no trouble with them before, then the rush to dual source may not be that great. On the other hand, if they have caused issues previously – potentially trying to take advantage of your dependence on them, then this represents a key reason to consider dual sourcing.
Final thoughts: Recognize the trade-offs associated with dual-sourcing
There are many possible reasons why dual-sourcing may make sense, as well as multiple disadvantages associated with the multi-source arrangements. Systematically considering which parts dual sourcing makes sense, and which the risk is more management is can help balance the additional cost that dual sourcing can bring with the benefits of reducing your dependence on any one supplier.
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