Considerations in Supplier Consolidation and Single Sourcing
Supply chain managers must constantly walk a series of tightropes balancing competing factors to bring the most value to their organizations. One of the toughest balancing acts is how to correctly source material to meet everyone’s requirements while maximizing value and minimizing risk. In some organizations, it’s the equivalent of tightrope walking across the Grand Canyon. That’s a greased tightrope…in a 40-mile-per-hour wind and pouring rain…while juggling hand grenades without the pins.
Generally, from a simple economic standpoint, the best choice for outsourced manufacturing is to consolidate when possible. A single vendor means greater control, simpler logistics, and decreased costs through the economy of scale and enabling of discounts. However, single sourcing can also introduce an element of risk. What happens if a natural disaster destroys your supplier’s plant, or if the quality suddenly falters? That can be the manufacturing equivalent of those pinless hand grenades.
As you balance benefits and risk management for your sourcing options, give some thought to the following issues.
Volume and Capability Requirements
The number of parts or assemblies may answer the supplier consolidation question for you. For any individual part, a low volume almost mandates single sourcing. No supplier will agree to be a secondary source if you can’t commit to enough volume for the supplier to make a profit on the effort. You may be able to establish a suitable partnership with one supplier that can handle a consolidated package combining critical low-volume parts with more profitable high-volume projects.
For such a partnership to be useful, the supplier has to have sufficient capability to meet all your needs. That could require multiple facilities, or auxiliary services such as rapid prototyping services and design capabilities. The more capabilities the supplier brings to the table, the more likely it is that you can consolidate your needs with that single supplier.
If no supplier has sufficient capabilities to handle all your needs, then you will have to find the best cost-benefit balance to spread out the projects and minimize the number of vendors. Choosing different vendors based solely on the lowest cost for each individual part or project can be a recipe for chaos and disaster—or at the very least, inefficiency.
Critical Parts, and Risk Versus Costs
How critical and expensive are the parts and assemblies that require outsourced manufacturing? Critical parts require backup and risk mitigation, but how is that best applied?
If parts are critical but inexpensive, the smartest route may be to simply keep a larger buffer supply on hand and eat the moderately higher inventory costs. However, when parts are critical and/or expensive, the decision becomes more complex.
Evaluate your logistical options—in other words, can your supplier offers a customized solution that gains you extra buffer time and minimizes the risk—and weigh that against the cost, qualification, and compliance concerns of developing a second supplier for that part or assembly. Seek a manufacturing partner that believes in collaboration, and you may be able to work out a unique solution that maintains your cost advantages while lowering risk.
Pushing Responsibilities Upstream
Every responsible supply chain manager must have a disaster plan in place for their company’s most critical parts. If you plan to consolidate your suppliers, think about how much of that risk can responsibly be pushed upstream. Does your supplier have multiple manufacturing facilities available in order to spread risk in case one goes down? Essentially that gives you multiple sources within a single supplier’s system.
Some risk elements cannot be pushed upstream—for example, reliability on quality and delivery, and the financial soundness of your supplier. Either a supplier can deliver on these qualities or they can’t. You can spread that risk by investing in multiple suppliers, assuming you have the volume capability to do so—or you can do your due diligence by checking into the reliability and quality history of your supplier. A single supplier with a proven and consistent track record is arguably lower risk than two suppliers with lower costs but less reliable individual performance.
What Does Qualification Mean to You?
The term “qualified supplier” can mean different things within different industries. In the world of electronics manufacturing, requalification of a process can be triggered by something as benign as relocating a production line, even within the same facility. It may be necessary to produce test qualification products before production can be resumed. In some industries, as long as the product meets specifications and standard inspection criteria, the source doesn’t matter.
Qualification/re-qualification needs must be factored into your risk analysis. When re-qualification triggers and costs are substantial, it’s important work with the suppliers to find the best solution. If each source must be qualified, can two facilities within the same supplier’s network be separately qualified at reasonable cost? If so, that provides a huge advantage. The cost and logistics of qualifying two completely different sources for critical parts can be prohibitive, and a backup supply within the same vendor greatly reduces everybody’s risk. There’s no reason to spend any more money than you need to for the qualification process.
Single Source with Security, Consolidate with Confidence
Not all of your projects or parts are best handled through a single source, and it may not be possible to coordinate your collective projects with a single vendor—but when you can, look for a vendor that can meet your supply consolidation needs without subjecting you to unusual costs or unnecessary risks.
Smartrend Manufacturing Group’s network of international factories and trained in-country staff can help you get the most out of your outsourced manufacturing dollar. You can consolidate as many outsourcing needs as possible and enjoy the corresponding efficiencies of single sourcing while minimizing the risk.
That supply chain tightrope might still exist, but at least we can provide clearer weather, clean off the tightrope grease, and remove the hand grenades. With planning, perhaps we can also cut it down from a tightrope over the Grand Canyon to a footbridge over a gentle creek. We’re all about minimizing risk while providing value.