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Dual sourcing: Advantages and disadvantages of diversified procurement

by Editor

With the increasing challenges in global procurement, many companies feel the growing need to secure their supply chain: If, for example, a supplier solely responsible for certain materials or resources were to fail, this would have serious consequences for production. Diversifying the supply chain through dual or multiple sourcing strategies is an effective means of strengthening resilience and reducing procurement risks. However, an increasing number of suppliers can also result in increased costs and more complex management processes. We compare the advantages and disadvantages of dual and multiple sourcing with the single sourcing concept and explain in which context which alternative is most prone to success.

Doubling up: The advantages of dual sourcing

In contrast to single sourcing, a concept in which goods are procured from a single supplier, dual sourcing ensures less dependency, as companies add an additional procurement source. If one supplier experiences delivery difficulties due to regional weather disasters, social unrest or geopolitical tensions, for example, the alternative sourcing option can compensate for this loss and provide risk diversification.

Dual sourcing is suitable for product groups that are strategically important and would otherwise not be available in a timely manner in the desired quality or design in the event of a supply bottleneck. In this context, it is worth establishing two sources and cooperating closely with both suppliers. Another plus attributed to this approach is the competitive fact that if companies distribute their procurement volumes among suppliers, this increases the pressure to innovate, motivates suppliers to raise their service level, and provides companies with a better basis for negotiation.

For products in product group A, i.e. highly complex items or items developed specifically for the company’s requirements that can only be offered by a small selection of suppliers, on the other hand, single sourcing remains the first choice. Here, it is more advisable to secure the supply chain through good planning of transports, warehousing and procurement processes.

Two suppliers, more effort? The disadvantages of dual sourcing

There are also disadvantages to dual sourcing, particularly from a financial and administrative perspective: If companies rely on a single source of supply, there is often more scope for volume discounts. If the order quantities are distributed among two suppliers, in most cases, the margin shrinks. In addition, a further procurement option means additional expense: the ordering processes need to be carried out several times, which means time is lost, and the risk of ordering errors also increases. Companies should also be prepared for additional costs with regard to transportation. Therefore, costs and benefits should be weighed strategically. A well thought-out and digitally controlled freight management  can provide advantages in this context.

Further diversification through multiple sourcing: advantages and disadvantages

If the company’s focus lies on strengthening the advantages of diversified procurement, a multiple sourcing strategy should also be considered. By expanding to more than two suppliers, there is an even greater spread of risk. Thus, even two or more sources could fail without causing major production problems, since greater diversification has already been established. Multiple sourcing also provides significant financial relief in purchasing, as companies can individually choose the most favorable supplier for a product.

Multiple sourcing is suitable particularly with the C-goods groups, thus materials and resources, which are little specialized and represent a smaller range in the production of an enterprise. What matters most in this scenario is a cost-efficient procurement and high standardization. Whilst these products must always be available, long-term cooperation and strategic supplier development are less factors.

It must be kept in mind though, that in the context of multiple sourcing, the administrative effort and associated costs increase as the coordination of all supplier processes becomes more complex. This includes communication, price comparisons, and the additional effort involved in receiving goods from multiple sources. Moreover, the possibility of volume discounts is reduced as mentioned above, as the quantities and orders per supplier decrease.

Dual or multiple sourcing: supply chain management ensures transparency

If companies opt for a dual or multiple procurement strategy, they do not need to accept the potential disadvantages, but can prepare for them in a targeted manner. In order to prevent the increased communication and coordination effort as well as the comparatively higher investment of time and money in administration from becoming an unnecessary burden, software-based supply chain management (SCM) can assist.

With the help of an SCM solution that can be adapted to any corporate eco-system, all actors in the supply chain can be networked via a cloud-based system and access rights can be defined securely and in line with requirements within a common communication architecture. The resulting transparency and control over all relevant processes ensure more communication, flexibility, security and resilience of the company. Thus, in the future, no resources are unnecessarily wasted.

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