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:
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:
For a copy of my version of the basic terms/conditions in a SCM P.O., see: https://lnkd.in/eE25asK
How should companies use competitive bidding?
Assume a supplier estimates the following costs on an RFQ
ROI and Your Core Competency (i.e., SCM?)
To stay competitive, companies are forced to outsource commodities and focus on their core competency
The primary elements for sourcing a supply partner
What does it mean to be hollow? Sourcing Strategy matters!
The most reprinted article in the Harvard Business Review: The “Core Competence” Article
You have every legal right to say you want a “cost breakdown”
How SCM managers “prepare” to negotiate price increases. https://lnkd.in/gVrdpuer
Recent observations & career advice (videos/podcasts):