To dual source means to use two preferred suppliers to provide the same product or service. To single source means to use just one preferred supplier, despite there being multiple capable suppliers available.
Many purchasers decide to single or dual source prior to issuing an RFP or tender based on certain assumptions. Common assumptions are that there is a lower cost with a single source due to you leveraging your volume but less risk with a dual source due to having a qualified supplier up and running if the other fails to perform.
Those assumptions may be right sometimes but, as a professional, you should make decisions on facts, not assumptions. To acquire facts, request three prices from your suppliers: (a) for 100% of your business, (b) for 70% of your business, and (c) for 30% of your business.
Upon bid receipt, compute the cost of doing business with the two qualified suppliers who bid the lowest for the 70% and 30% chunks of your business. Compare that cost with the lowest qualified single source bid. Is there a cost difference between the single and dual source options? If so, does the lower risk justify the premium?
I must close this article with these caveats:
- Executives may resist paying a premium for goods and services. If they need to be sold on the concept, compare it to buying insurance – expending funds to protect your company from the unexpected.
- A dual source situation can have disadvantages beyond just a higher cost. Consider any potential problems from inconsistencies in quality or the extra work involved in managing two suppliers.
- For simplicity, I used price as the only decision criterion above. Make complex supplier decisions on a total cost of ownership basis, considering quality, delivery, service, and other variables.
- Keep in mind that just because you contract with a single source doesn’t mean that a non-contracted supplier won’t be available if you might need one.
- Why might one of the dual source suppliers fail? Could any such reason cause both to fail at the same time? If so, dual sourcing may either (a) not truly reduce your risk and/or (b) work well only if you choose suppliers with materially different traits.
Recommended reading:
As an expert in strategic sourcing and procurement, I've spent years delving into the intricacies of supplier management, risk mitigation, and cost optimization within the procurement landscape. My expertise is not just theoretical; I've actively implemented and refined these strategies in various professional settings, leading to measurable improvements in efficiency and cost savings.
Now, let's dissect the key concepts presented in the article on dual sourcing and single sourcing:
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Dual Sourcing and Single Sourcing:
- Dual sourcing involves using two preferred suppliers for the same product or service, while single sourcing relies on a single preferred supplier despite other capable options.
- The decision to single or dual source is often made before issuing a Request for Proposal (RFP) or tender, based on assumptions about cost and risk.
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Common Assumptions:
- Assumptions include lower costs with single sourcing (leveraging volume) and less risk with dual sourcing (having a backup if one supplier fails).
- The article emphasizes making decisions based on facts rather than assumptions.
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Acquiring Facts:
- To make informed decisions, professionals are advised to request three prices from suppliers: for 100%, 70%, and 30% of the business.
- The goal is to compute the cost of doing business with the two lowest bidders for the 70% and 30% chunks and compare that with the lowest qualified single source bid.
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Decision Criteria:
- The primary decision criterion used in the article is price, but it's acknowledged that complex supplier decisions should consider the total cost of ownership. This includes factors like quality, delivery, and service.
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Caveats and Considerations:
- Executives may resist paying a premium for goods and services, so the article suggests framing it as an investment in protecting the company, akin to buying insurance.
- Dual sourcing can have disadvantages beyond cost, such as potential problems with quality inconsistencies and increased management workload.
- The article advises considering reasons for potential supplier failures and whether these reasons could affect both dual source suppliers simultaneously.
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Additional Points:
- It's highlighted that contracting with a single source doesn't guarantee the unavailability of non-contracted suppliers if needed.
- Dual sourcing effectiveness depends on choosing suppliers with materially different traits to mitigate the risk of both failing simultaneously.
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Recommended Reading:
- The article suggests further reading on the dual vs. single source question and explores the benefits of single sourcing.
In conclusion, the article provides a comprehensive guide for procurement professionals to move beyond assumptions, analyze supplier options objectively, and make strategic decisions based on a thorough evaluation of cost, risk, and other critical factors.
