We’ve all heard the saying, “Don’t keep all your eggs in one basket.” Choosing to dual source a category means using two (or more) suppliers to provide identical copies of a product or service. Many companies choose to dual source a product to maintain quality levels of service to their customers and mitigate potential supply chain issues.
What are the benefits of dual sourcing?
1. Ability to Scale Your Business
When you project an increase in customer demand, the first question you should ask yourself is, “Can my current supplier handle the expected increase in volume?” For example, do they have the capacity to provide you with 100% of your demand along with the appropriate service and fulfillment rates? This may be a case for dual sourcing; after all, you can’t sell a product when it isn’t available. Being out of stock means money lost for your business in the short-term and lost contracts in the long-term. Dual sourcing can mitigate this lost revenue and potential loss of customer loyalty. Many times when a supplier cannot match your ramp up in demand, you will continuously fall behind in fulfilling open orders and potentially lose accounts altogether.
2. Covering Your Bases
During my time with a major U.S. retailer, we ran into a recall issue with a certain supplier which caused us to pull product off the shelf. We were not dual sourcing, so we ran into inventory and shelf-presentation issues. For a retailer, not having product on the shelf is a major NO-NO, and our customers stopped coming to us to fill their wants and needs. Having an alternate source in the case of recalls is critical. Many times your alternate source has safety stock in warehouse and can fulfill all, if not most of, your missing inventory. This may come at a price, but it is wiser to contract with two companies, than to lose the opportunity to provide product to your customers. You can even make safety-stock a point of discussion in contract negotiations and establish an agreement that if a disruption strikes they will help to the best of their ability.
3. Co-locating Supply and Demand
This third point is arguably a result of either of the two reasons above, but I find it warrants its own emphasis. I am speaking about the logistics considerations of dual sourcing. When you dual source a product, many times the manufacturing plants are in different regions and locations of the country or world. If customer demand or your production facilities are geographically dispersed, suppliers may be best suited to provide products and services to the nearest stores/distribution centers/facilities. In this case, you can save on freight charges and decrease lead times. Alternately, if supplier locations are close, you may be able to consolidate the product and ship in full truck loads rather than partial shipments. With dual sourcing, many times you can find logistics cost savings as well as service lead times improvements.
In a competitive world, where customer loyalty and market share truly matter, there are many reasons why you should consider dual sourcing a product or service. The above three instances are sufficiently compelling to make it worth procurement’s time to at least consider the tradeoffs in cost, service, and risk mitigation. You can’t sell a product when it’s not available, and you can’t run the risk of losing your customers to your competitors.