One of the key questions to ask when creating a supply chain strategy is whether to buy from one source or more. There are pros and cons to both approaches.
Working with more than one supplier adds complexity to the supply chain, but it also provides protection against certain risks. Finding a balance between these two concerns is a key factor in deciding your optimal supply chain strategy.
Advantages of using a single source of supply
Single supplier strategy commits to purchasing a given resource from just one supplier. If the supplier is well-matched and reliable, this can offer some benefits to businesses. For example:
- forging a relationship is easier with one supplier than with multiple ones
- partnership approach may help builds trust and shared benefits
- costs may fall due to economy of scale if you order from just one supplier
- integration of systems may be easier with a single supplier
Disadvantages of single supplier strategy
Relying on single sourcing can expose you to the possibility of not being able to get critical supplies if the supplier's operations are disrupted. Common drawbacks of this strategy include:
- increased vulnerability of supply
- increased risk of supply interruption
- greater dependency between your business and the supplier
If you decide to source from a single supplier, and they let you down, go out of business or become unable to meet the demand, you may find yourself in difficulties.
Exclusivity may spur some suppliers to offer you a better service, but others may simply become complacent and drop their standards. This sometimes happens in cases of lopsided dependency, when the buying company becomes more dependent on the supplier than the other way around.
Advantages of using multiple sources of supply
Multiple sourcing strategy can benefit businesses who prefer to spread demand across a number of suppliers that, collectively, have more capacity and are more responsive to the buyer. It is also necessary when one supplier is unable to meet the total requirements of the buying organisation - for example, where a product has multiple components that no one supplier can produce.
Common benefits of multiple sourcing include:
- less reliance on any one supplier providing a safety net if a supplier runs into difficulties
- more flexibility to cope with unexpected events that could jeopardise capacity
- fewer bottlenecks as more suppliers are able to meet peak demand
- competition often provides an incentive for suppliers to improve cost and service
- competition between suppliers also often provides the buyer with more bargaining power
Disadvantages of multiple supplier strategy
Multiple supply sourcing may benefit dependency, flexibility and capacity, but it can complicate supplier relationships and require greater resources to manage them. As supplier numbers grow, the price tag often goes up and the following drawbacks can occur:
- information sharing may become more complex
- higher costs for contract negotiation, management, and process execution
- lower order volumes reduce bargaining power
- the ability to save through economies of scale in reduced
- challenges can come up in terms of quality control and efficacy
In general, smaller businesses tend to have less flexibility than larger ones when it comes to choosing suppliers. If you're considering multiple supply sources, you should balance the potential disadvantages of this strategy against the risks of supply interruption that could arise from having just a single supplier.
Remember to consider all other relevant criteria for selecting a supplier.
Focus your efforts on choosing and managing strategic suppliers who provide goods or services that are essential to your business. A strong relationship will benefit both sides. See more on managing supplier relationships.