Second Thoughts on Second Sourcing

A widely used method for mitigating supply chain risk is multi-sourcing — using more than one vendor to supply specific items. But there are significant risks to consider.

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Not keeping all of your eggs in one supply basket is an appealing strategy to increase supply chain resilience. But it’s not always effective.

Aircraft engine maker Pratt & Whitney has doubled up suppliers in an effort to avoid interruptions to the production of its new turbofan engine. But according to a recent Wall Street Journal article, nearly half of Pratt’s 1,600 suppliers are still failing to deliver parts on time.

Multi-sourcing, of course, isn’t the only way that companies can work to ensure a reliable flow of supplies. The main alternative to multi-sourcing is investing in key supplier relationships. There are a number of ways that companies can do this. Some buyers embed representatives in partners’ organizations, and carry out detailed analyses of vendors’ financial positions. Embedded reps can also influence suppliers’ use of sub-tier suppliers, and even advise on the appointment of senior executives.

But developing these kinds of deep relationships is expensive and time-consuming, and as a result they are typically confined to strategic and, sometimes, critical supplies. Dual- or multi-sourcing is often a more attractive option, especially for non-strategic items.

Five Questions to Assess the Risks of Multi-Sourcing

But before rushing to find alternative suppliers, companies should delve into the strategy’s pros and cons. There are a number of drawbacks to the mitigation strategy of dual- or multi-sourcing that companies need to be aware of. The strategy can be costly, and it can actually increase certain types of risk. Companies should explore these five questions before moving forward.

  1. Are all the sources in the same geographic area? Companies need to beware of source clusters, because choosing second or third suppliers in the same geographic area might not spread the risk. In 2011, for instance, Thailand experienced severe flooding due to unusually high rainfall levels. At the time, Thailand provided 45% of worldwide hard-drive production. Four of the top five suppliers — Western Digital, Seagate Technologies, Hitachi Global Storage Technologies, and Toshiba — had facilities or key suppliers in Thailand, and all four suffered serious disruptions when the flooding occurred. These disruptions subsequently caused shortages of disk supplies. Second sourcing did not help much, because many of the alternative suppliers were located in the same disaster zone. Similarly, much of the world’s chip capacity is concentrated in the north of Taiwan — an area prone to earthquakes.

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Comments (2)
ramani sankaran
"Trust in God  and keep your gunpowder dry.". Trust in the first source but keep a second source as ready as possible for emergency management. This  softens the lead time to operationalise the second source in an emergency.
Ramani Sankaran
Dr Rabindranath Bhattacharya
Keeping all the eggs in one basket is always risky and in India we always believed in multiple sources (2/3/4) to avoid disruption. Purchase managers in most of cases have been observed to be under tremendous time pressure and hence would not like to nurture or cajole the suppliers (Single sourcing) for supply of materials. However Japanese so long believed in single sourcing based on relationship and trust but the myth of late seems to have been shattered by tsunami and earthquakes. 
There are two ways to mitigate this- one is to expand the capacity of the plant inside same premises as you had indicated (this is risky) or elsewhere (where disasters are less likely to occur) and the second one is to go for  second sourcing. However all the factors are to be taken into account for selecting the second source and the help of a cross functional team could be sought to avoid disappointment at the end. Switching over from one supplier to another partly or fully is not an easy job and has to be handled with extreme caution - Dr. Rabindranath Bhattacharya, Visiting Professor, Calcutta