Dual sourcing is one approach for reducing your dependence on any one supplier. For key components, companies can look to have multiple suppliers that are able to provide the parts. This article explores the reasons for dual sourcing.
Advantages of dual sourcing
Avoid becoming dependent on any supplier
Possibly the main advantage of dual sourcing is that it avoids you becoming dependent on any one supplier. If you have only one company that is able to provide the specific components to you, then you risk becoming very beholden to them. They may look to exert this power by increasing the price of your inputs – if you have no other options you may be forced to accept a price increase.
Having multiple firms that you have arrangements with can help reduce this risk. If one company looks to increase the price for their goods, you can more easily turn to a different supplier. Not only does this give you options, but it also reduces the risk of your supplier looking to increase prices in the first place – they know that you would likely reduce your purchasing from them were they to increase prices. In effect, you have reduced your switching costs, and in turn, reduced some of your supplier’s power.
Greater flexibility and robustness of the supply chain
Another advantage that comes with dual-sourcing is that it increases your flexibility should there be disruption with a particular supplier. If one company experiences manufacturing challenges – potentially associated with their technology, labor strikes, or some weather disruption – you have another firm that you can turn to. This helps make your supply chain robust to various forms of disruption.
Of course, it is important to consider the extent to which this potential benefit does play out. If both of your suppliers are similarly geographically located, an environmental disaster is likely to impact both firms. Relatedly, if one firm experiences disruptions in its operations, then unless the other has additional capacity to take up the slack, you may still experience sourcing difficulties.
Limitations of dual sourcing
While there are many advantages associated with dual-sourcing, there are also some key limitations to be aware of:
Requires negotiations with two companies
One of the primary limitations of dual sourcing is that it requires to you to negotiate two contracts and maintain relations with two separate suppliers. There is inherent duplication in activities, potentially increasing your transaction costs associated with the supply relationship. While you may not be as dependent on a particular supplier, other costs will likely increase.
Prices may be greater due to lower purchasing quantities
In addition to the additional difficulty in negotiating the contracts is the possibility of higher prices from lower purchasing quantities. A benefit of buying from one firm is that you gain greater purchasing economies of scale – potentially resulting in a lower unit price from your higher volumes. When you split the purchasing power, your ability to get a better price may be impacted – compensating against some of the additional power that you may have from being able to walk away from the negotiations.
There may be discrepancies between the two suppliers
A further challenge with dual sourcing is that there may be discrepancies between the quality of the goods from both suppliers. Interactions between slightly different components made by different firms may result in slightly different experiences for your customers – potentially resulting in reductions in customer satisfaction if they get ‘inferior’ versions of the product.
Both firms may be more reluctant to make investments
While there are clear risk-reduction benefits associated with dual-sourcing for you as the sourcing company, for the firms that are supplying the components, their risks may increase. They may be concerned that given you have options, that you will now be more likely to walk away – potentially resulting in them with a loss associated with investments that they have made to their operations to accommodate manufacturing your products. At the extreme, instead of having a firm willing to make necessary investments in an exclusive arrangement, you may have two companies that are both very reluctant to make any needed investments for fear that they will be easily replaced and the investments redundant.
Final thoughts: Consider the components where dual sourcing may make the most sense
A key question when considering dual sourcing is not whether it is better or worse than single-sourced parts, but rather for which parts dual-sourcing makes sense. Consider which are the components that you are most concerned about being taken advantage of in a single-source relationship. Consider which parts you would be vulnerable to should that firm experience disruption – potentially not able to transition easily to another company without a long lead-time. You need not dual-source all parts, but there may be some that it does make strategic sense to do so.