When it comes to supply chain management, there are several prevailing philosophies. Many companies consolidate purchasing with a small pool of vendors, choosing to build long-term, mutually beneficial relationships over time. Others diversify across many suppliers and avoid becoming dependent on a single source.
Over time, however, many companies employ a hybrid model, recognizing that they can get the best of both worlds. Given industry pressures and dynamics in the electronics component space, multi-sourcing is becoming an increasingly attractive option for global buyers.
Pricing Discounts With Single Sellers
By consolidating purchasing with one or a few suppliers, buyers gain access to pricing and contract advantages that would otherwise not be available. With single-sourcing, companies can build lasting relationships and dictate customer service requirements to their specific needs.
It’s also easier for buyers to manage relationships with fewer vendors. There is less integration required between buyer and supplier systems. Additionally, it’s less costly from an administrative standpoint.
On the downside, customers may be wary of working with companies with highly consolidated supply chains as fulfillment is closely correlated with vendor operations. Over time, dependency can also shift too far in one direction and leave one side of the agreement at a disadvantage in the relationship.
Increased Diversification With Many Sellers
Contrary to single-sourcing, broad diversification enables buyers to spread their purchasing across many suppliers. With this route, there is less risk tied to the performance of each individual vendor. Buyers with diverse supply chains are less likely to be adversely affected if a few suppliers hit hard times.
The major disadvantage of this approach is that buyers have less leverage over each individual vendor. It’s difficult to negotiate pricing discounts and guarantee customer service levels with small purchasing agreements. Also, the more partnerships, the more complex relationship management becomes.
Multi-Sourcing: the Best of Both Worlds
With multi-sourcing, buyers get the best elements of single-sourcing and diversification. They can build long-term relationships with a few vendors while also diversifying to protect against supply issues. Without putting all their eggs in one basket or spreading too thin, companies can supplement lean supply chains with reputable backups that could fill a gap, if needed.
In hyper-competitive spaces with supply shortages, like the electronic components industry, multi-sourcing has clear advantages. Companies can set up relationships with suppliers that guarantee certain production capacity in the event that any concerns arise with primary vendors. In other words, this is diversification without incurring the administrative costs or complexities associated with actively managing many supplier relationships.
“Developing an effective risk mitigation strategy against these inevitable threats is paramount to success in the global marketplace,” says supply chain services provider, IndustryStar. “This is like a diversified supply strategy, but different in one key aspect: It’s cheaper.”