DUAL SOURCING: IS IT A GAMBLE FOR SUPPLY CHAIN MANAGERS?

Dual sourcing, single sourcing, cross-sourcing, and multi-sourcing are all terms you hear a lot when you’re talking about a manufacturer’s supply chain. For many manufacturers, there are so many materials that must be purchased to move their good from production to the final consumer, that they must have a vast network of suppliers. In other cases, manufacturers choose to manage their supply chain with a minimum of suppliers and keep their network very narrow.

• What is dual sourcing?
• Dual sourcing vs. single sourcing – Pros and Cons
• Benefits of dual sourcing
• Dual sourcing strategy
• Is dual sourcing the same as cross sourcing?
• What about multi-sourcing?

Of course, there are others that fall somewhere in between, but no matter which strategy you use, sourcing is an important part of managing a successful supply chain. So is dual sourcing a gamble for purchasing managers or supply chain managers? Let’s explore.

What is Dual Sourcing?

When it comes to supply chain management, dual sourcing is the practice of using two different suppliers for any particular raw material, product, service, or component. As an example from our own business, dual sourcing would be if a manufacturer uses Conner to supply 70% of the industrial wood or pallets they need and uses a competitor to supply the other 30%.

Of course, we’d love to supply 100% of a company’s wood needs, but we understand why manufacturers choose dual sourcing. From the manufacturer's perspective, relying on a single supplier can carry a certain amount of risk. Things like natural disasters and weather can affect a supply source, through no fault on the part of the supplier, but that still affects the manufacturer who’s depending on the material. Dual sourcing helps to mitigate that risk.

Dual Source vs. Single Source – Pros and Cons

At this point, you may be asking yourself about the pros and cons of dual sourcing versus single sourcing. While dual sourcing definitely has some key advantages, there can be a downside too.

One of the biggest disadvantages of dual sourcing is the possibility of inconsistent quality between your two suppliers. If one of your suppliers provides superior quality, but your other supplier’s quality isn’t quite as good, that may cause you problems. In the wood packaging market, inconsistent quality can cause failures and may even result in product losses and damage.

The last real disadvantage that some supply chain managers discover is the price. While it seems like manufacturers would always realize a lower cost for their supplies when they’re pitting two vendors against each other, that isn’t always the case. There are other factors that can affect the price when you’re dual sourcing, such as:

• You may not get the same volume pricing because you’re splitting your purchase, and the volume you need, between two vendors. You won’t have as much buying leverage if your individual spend is smaller.
• Ideally, your vendors are in slightly different geographic locations in order to diminish the chances of a natural disaster or weather affecting your supply. That means there may be additional shipping costs involved in getting the materials to their destination.
• If dual sourcing requires a lot of additional man-hours or resources to manage, then you must consider that when you’re determining the real price of your materials under a dual sourcing strategy.

If cost is your biggest concern, which is for many manufacturers, be sure that your supplier decisions are based on the total cost of ownership. That total cost of ownership should include any potential profit losses that may occur in the event of a supply disruption that halts production. Dual sourcing is often viewed as an “insurance plan” against that possibility.

What are the benefits of dual sourcing?

It’s pretty easy to see what the disadvantages of dual sourcing might be, so now let’s talk about the benefits of dual sourcing for a manufacturer.

Can Have Cost Savings

Earlier, we pointed out that dual sourcing can increase costs, and that’s true, but it can also lower costs if you do a realistic evaluation of your total cost of ownership. Here’s why:

• Dual sourcing prevents supply monopolies that keep prices higher. Having more than one supplier ensures that no single vendor can have too much leverage in your purchasing relationship.
• Sourcing more than one company drives competition. This may lower your supply cost, or may even add extra benefits that you can acquire from a supplier because they want to get or keep your business.
• Freight charges can be reduced if you have multiple manufacturing locations and more than one source to supply them. In other words, you can choose the supplier closest to each of your facilities and save freight costs, instead of using a single supplier source that only ships from a single location.

Encourages Innovation

When there is competition for your business or even a portion of your supply, it not only drives costs down, but it also drives innovation in your suppliers. Using the same source, year after year without question means you may not be benefiting from the best innovations that any given industry can offer.

On the other hand, dual sourcing drives your suppliers to offer more and better innovations in order to be competitive and differentiate themselves. Single sourcing doesn’t allow you to take advantage of that competition.

Scalability and Company Growth

Dual sourcing gives your company the opportunity to scale production, where a single source may have a lot of difficulties meeting your additional supply demands. If you can’t get the increased supply you need, you may not be able to keep up with increasing customer demand, and that’s not good for company growth.

Supplier Changes Are Easier

Relationships with your suppliers can change over time, as we all know. Sometimes the vendor that was your best supplier a year ago can turn into your most under-performing and difficult supply chain relationship today. If you only use a single source for your materials, letting go of a bad vendor can be difficult. On the other hand, dual sourcing allows your other vendor to pick up the slack while you find another source.

Dual Sourcing Strategy

It’s pretty clear that there are both advantages and disadvantages to dual sourcing vs. single sourcing. Having a clear understanding of a dual sourcing strategy will probably make clear which option is best for your organization.

Strategic sourcing is well beyond the scope of this article and can get a little complicated in some organizations. Manufacturers often have to dig pretty deep into analyzing the entire lifecycle of their product, not just the initial cost, to determine the best sourcing strategy. They also use that data to formalize their information gathering process and leverage their analytics to make the best possible decision on a dual sourcing strategy.

Once all that lifecycle analysis is done, you’ll need to start researching possible vendors to find your best options. Here are a few basic things to keep in mind as you’re exploring the possibilities:

• Does the supplier have a reputation for good quality, responsive support, on-time delivery, inventory or production problems, hidden fees, etc.?
• Can they meet your volume?
• Can they meet your timeline?
• Are they in a good geographic location in relation to your facility?

Once you’ve found a few suppliers that you’re interested in, it’s time to start looking at pricing. In most cases, a supplier will need information from you in order to provide pricing, so it’s time to request a quote. One dual sourcing strategy that many manufacturers use is to ask for three different quotes:

• RFQ for 100% of your business
• RFQ for 70% of your business
• RFQ for 30% of your business

The reason manufacturers ask for all three quotes is that they want to do a cost/benefit analysis of the supplier in order to find that sweet spot where they are getting the most bang for their buck. Once that RFQ is received, the manufacturer will assess the total cost of doing business with the supplier at each percent of the business, then determine if the cost can justify the risk reduction and other benefits they’ll receive by dual sourcing.

Another dual sourcing strategy that often comes into the equation is to choose two different vendors with materially different traits. For example, one might choose a large global company as one source, and a smaller national or local business for the other. Each would have different strengths and weaknesses that would lower the overall risk to the supply chain.

Is Dual Sourcing the same as cross sourcing?

As a practical matter, dual sourcing and cross sourcing aren’t all that different. In cross sourcing, a manufacturer uses a single supplier for one part or service, and another supplier with the same basic capabilities for a different part or service. The idea behind cross sourcing is that each supplier can act as a backup for the other supplier in the event of a disruption.

For example in our business, cross supplying would be if a manufacturer asked Conner to supply the deck boards for their pallets, but asked another company to supply the stringers. Either of us could supply both in the event that there is a disruption of the supply from the other.

What about multi-sourcing?

Multi-sourcing in a supply chain carries many of the same potential risks and advantages as dual sourcing. In a multi-sourcing situation, manufacturers award a portion of their business to a number of different suppliers, rather than just one (single sourcing) or two (dual sourcing).

The biggest disadvantage of multi-sourcing is the additional effort required to track all your suppliers’ performance and manage multiple relationships. It has also been argued that multi-sourcing can actually increase your risk of disruption because you give suppliers a smaller percent of your business, and therefore don’t develop the same relationship with them.

In addition, when manufacturers multi-source, their suppliers also provide materials to their competition. In other words, multi-sourcing can overlap supply chain networks with your competition and may even increase the possibility of industry-wide supply disruptions.

Conclusion:

In the end, choosing a sourcing strategy for your supply chain can be a gamble for purchasing managers and supply chain managers if you don’t do your homework. As with everything else, the key is to choose the strategy that works best for your company’s needs.

While some manufacturers like to use a single source for their materials, doing so can put your supply chain at significant risk and cause production problems. A dual sourcing strategy, on the other hand, not only reduces your risk of supply disruptions, but it can also lower costs, encourage innovation, and allow your company to scale production and grow quickly.