Explanation on Single Sourcing versus 70/30 Split
I had a student email me with this work situation. How would you handle this situation?…Our current supplier is a small subsidiary of a parent company that is considered very high risk by our credit & finance group.
They do not want us to do business w/ this supplier because based on their financials the parent company could easily go bankrupt. The problem is this supplier is very cheap & we can’t find any supplier who can match their prices, so as a buyer, I either have to absorb cost increases that would add up to around a $1M annually or continue to do business w/ a high risk supplier. Lead time for tooling is around 14 weeks so if current supplier went bankrupt we would be in a huge bind to get parts to our customer in a timely manner.
I think the student’s question boils down to assigning a probability to the potential for bankruptcy (.5 sounds reasonable here) & assigning a total cost to the activities associated w/ bankruptcy. My “knee-jerk” reaction is that the savings isn’t worth the trip here. For most mfg emergency “resourcing” actions, you’re looking at a minimum of $200K direct costs (moving tools, building parts banks, temporary leasing space to store banked parts, supplier qualifications, re-start costs, etc.). The “indirect” costs of customer quality issues, additional inspection, “containment”, etc., is usually at least twice the direct costs. Also, this company is a first-tier auto supplier which means its customers are OEMS like GM & Ford These OEMS will bill you $1M/hr if you shut down one of their plants. Furthermore, they will have major issues doing future business w/ you if they find out you used a supplier with 50/50 chances of going bankrupt. I suppose another option is to dual source the parts between the “cheap” supplier & a more stable supplier. Obviously, if you do that, your savings potential diminishes greatly as a result of reduced volumes & additional tooling costs. Another thing to consider – If you are a buyer, is it your responsibility to also manage your supplier’s suppliers? For example, should you be so proactive as to know that your supplier’s supplier has a 50/50 chance of going bankrupt?
Well, that would be the next level of strategic proactive SCM. This company used a single source because of the cost savings associated w/ giving one supplier all the business (& this supplier was super cheap to begin w/ – perhaps that is a part of the reason for them potentially going bankrupt). U.S. orgs love to single source for the cost savings & they claim to have contingency plans in place to mitigate risk. In general, the Japanese like to offset the risk by using dual sources of supply (70/30 split), especially if they do not lose too much in price discounts by splitting up the volume.
Classical read on sourcing strategy w/ my notes from grad school:
https://lnkd.in/gtCy_rBs
Here is the supporting video lecture on sourcing strategy:
Also, related procurement strategy reading:
A great read on the “exciting” world of competitive bidding & RFQs. Malpractice? 50% of the World’s Lawyers are American (we are 4% of the global population)! U.S. Tort Costs (think lawsuits) as a % of GDP is 2.4% (the avg for industrialized nations is .8%).
The Bad Actors of OEM Procurement.
“When sending out a request for quote (RFQ), original equipment manufacturers have the option of soliciting bids either on individual parts or parts packages as a whole. This latter practice is often referred to as bundling, and its purpose is to incentivize suppliers to quote in the most competitive manner since they can sense a significant amount of business is at stake. This practice, in itself, is not procurement malpractice.” For rest of read:
https://lnkd.in/g8xsaKTa
For a copy of my version of the basic terms/conditions in a SCM P.O., see: https://lnkd.in/eE25asK
Reads…
How should companies use competitive bidding?
https://lnkd.in/gS9vCRQ6
Assume a supplier estimates the following costs on an RFQ
https://lnkd.in/gxFBz3_U
ROI and Your Core Competency (i.e., SCM?)
https://lnkd.in/euh2rFdU
To stay competitive, companies are forced to outsource commodities and focus on their core competency
https://lnkd.in/g-DHtt8X
The primary elements for sourcing a supply partner
https://lnkd.in/ga2xtDsi
What does it mean to be hollow? Sourcing Strategy matters!
https://lnkd.in/gHB-nzeJ
The most reprinted article in the Harvard Business Review: The “Core Competence” Article
https://lnkd.in/gDsHme-r
You have every legal right to say you want a “cost breakdown”
https://lnkd.in/gygd5bzs
Procurement 101: Explanation on Commodities
https://lnkd.in/g_nEgvhJ
How do companies outsource strategically?
https://lnkd.in/gevbRKEq
POs & Advanced Contract Mgmt: https://lnkd.in/gcpHEEvw
How SCM managers “prepare” to negotiate price increases. https://lnkd.in/gVrdpuer
Hundreds of SCM Blogs…
https://lnkd.in/e5zG6sZ
https://lnkd.in/g9_XQdaG
Recent observations & career advice (videos/podcasts):