Second Sourcing and Multi Sourcing

If there’s one thing the last few years have taught us, it’s to expect the unexpected. A global pandemic, geopolitical conflict, driver strikes, a ship stuck in the Suez Canal—whether short- or long-lived, these events can be impossible to predict, create far-reaching supply chain challenges, and put your business at risk. Consistent suppliers, even whole countries, that were once your most reliable partners are suddenly experiencing disruption and volatility. How do you ensure business continuity in such tumultuous times?

Recent supply chain challenges have reinvigorated OEMs’ interest in maintaining additional providers for their parts or components. Second sourcing, in which two vendors are contracted to fulfill a company’s production needs for a given part, and multi sourcing, in which three or more vendors are utilized, are hardly new concepts. Increasing supplier competition and the globalization of manufacturing beginning in the 1980s gave birth to modern procurement. Procurement managers with access to additional suppliers incorporated second-sourcing and sometimes multi-sourcing strategies to resolve supply issues with their traditional providers, reduce costs, and improve the customer service they receive from all providers.

Image Credit: Pierre Marcuse

Fast forward to 2022: Although second sourcing and multi sourcing are somewhat common practices in procurement, there are a number of reasons that organizations may not be leveraging these strategies to their fullest potential:

• Specialization: The more highly customized the component, the more difficult it may be to find multiple vendors who can support its production. Out of ease or, in some rare cases, necessity, the manufacturing of a specialized part may be limited to one provider.
  
• Lack of Resources: Finding and vetting additional suppliers and maintaining the associated contracts and relationships requires time and manpower that many OEMs don’t have.
• Loss of Control and/or Quality: With additional supplier relationships to manage, it can be more complicated to maintain control over production and logistics across different facilities. In addition, many OEMs fear they will be unable to focus on or control quality across multiple vendors, choosing instead to stick with one trusted provider.
• Cost Concerns: In some cases, adding a supplier creates incremental costs (for example, additional quality or safety testing for components produced by a new vendor).

In most cases, an experienced supply chain partner like Chainlogix can eliminate the above concerns. A company with extensive manufacturer relationships can help source providers that are capable and trustworthy, have appropriate customer service and quality standards, and can compete on price. This removes much of the responsibility, and extra work, of second sourcing from your plate.

What Are the Benefits?
While not all the barriers listed above can be fully eliminated in all instances, the advantages of moving beyond single sourcing nearly always far outweigh the downsides. The primary benefits of second and multi sourcing, while well-known across the purchasing field for many years, have been magnified following the onset of COVID-19 and subsequent supply chain crisis:

• Supply Assurance: Contracting with multiple suppliers creates redundancy in case of issues with a primary provider, such as an unexpected line down situation. Having access to multiple suppliers, not just for standard components but also for more strategic and customized ones, allows production to continue when a supplier is offline.

• Increased Production Capacity: Having access to additional suppliers creates the ability to increase production, often by large quantities on somewhat short notice. This can be especially helpful in case of an unexpected spike in demand for your product, or if you wish to scale up production beyond the capacity of your primary supplier.
• Cost Savings and Service Improvement: Take it from Harry Hough, CEO and president of the American Purchasing Society, as quoted in this article from American Express: “Using multiple sources provides competition and an incentive for each supplier to improve cost and service. Some organizations award a higher percentage of the business to the supplier with the lowest cost or best performance."

While single sourcing may have worked well for an organization during times of predictable supply and demand, the potential downsides in today’s ever-changing environment have become increasingly threatening. As a result, many OEMs have adopted multi sourcing strategies to mitigate risk and maintain flexibility during uncertain times.

While adopting a second/multi-sourcing approach brings some benefits inherently, some OEMs find more success with these approaches than others. Here are a few strategies that will help you extract maximum value from your sourcing:

• Be Proactive: Many OEMs rely on second sourcing as a fallback, only switching production away from the primary provider in the event of a disruption. Electronics Sourcing Magazine stresses the importance of a more proactive approach to sourcing: “It is important to keep your second and possibly even third source lines in the mix. Provide them with a minor share of the production schedule to keep their interest. Expecting them to jump right in at the time of an emergency is a poor approach and could lead to the shocking reality that these suppliers are simply not ready when you need them most. Second sources are typically higher in cost, but paying the extra price may prevent you from paying the ultimate price of a line down.”
• Ensure Geographical Diversity: Having multiple suppliers in the same state, country, or region may prove to be just as risky as single sourcing. For example, let’s say you produce semiconductor chips across several facilities in central and eastern Europe. These factories all source neon gas from Ukraine, production of which virtually halted overnight following Russia’s invasion in February. Although your chips come from multiple providers, none of them can fulfill your orders due to this unforeseen conflict. A more geographically diversified approach to sourcing, perhaps including some production in Asia, could help avoid a disruption during a regional crisis.
• Leverage Technology: In our rapidly changing world, having real-time visibility into your supply chain is critical for making informed decisions. Access to an Enterprise Resource Planning (ERP) system, such as that which Chainlogix employs, facilitates full process transparency, provides more accurate demand forecasting, and can help identify additional providers to bolster your AVL.
• Stress Test Your Supply Chain: An important and often overlooked aspect of sourcing is understanding your risk and identifying areas that may need attention, before the next disaster strikes. Harvard Business Review advocates understanding your supply chain’s Time to Recover (TTR), how long full recovery would take after a disruption somewhere along the chain, and Time to Survive (TTS), the maximum amount of time your supply chain can meet demand after a disruption, for different scenarios. As one example, “if the TTR for a given facility is greater than the TTS, the supply chain will not be able to match supply with demand unless a backup plan exists. This approach provides companies with a way to financially quantify the cost of disruptions and prepare mitigation plans for the most critical parts of the supply chain.” For more information about these metrics, check out this Supply Chain Dive article about emerging KPIs that help companies plan for potential supply chain disruptions.

Let’s face it: supply chain management is complicated, and being prepared for the next black swan event could mean the difference between your organization’s success and failure. When disruptions happen (and they will happen), you can’t afford to wait, and you can’t afford substandard quality. A good second/multi-sourcing strategy goes beyond mitigating risk and creates calculable value for your organization.

If you’re interested in implementing or expanding your sourcing strategy, schedule a call with Chainlogix today. We’d love to discuss how we might help you expand your AVL and create a more reliable and resilient supply chain.