To acquire facts, request three prices from your suppliers: (a) for 100% of your business, (b) for 70% of your business, and (c) for 30% of your business. A risk/benefit analysis of sourcing strategies: Single vs Multi-sourcing offers benefits, but complex to manage Mega IT outsourcing deals spanning multiple years are no longer a fad due to business concerns over vendor lockin and lack of … In the consultants’ case, Mexico was the nearby but expensive source and China distant but cheaper. A dual source situation can have disadvantages beyond just a higher cost. © Caldwell Manufacturing 2019. Every quarter you must translate your market demand forecasts into target production quotas for both sources. Consider any potential problems from inconsistencies in quality or the extra work involved in managing two suppliers. He said, “I am very pleased on a personal level with this paper because it is the first time in my work when theory and practice have gone so beautifully hand in hand.”, Member of the Department of Managerial Economics & Decision Sciences from 2005-2016, Harold L. Stuart Professor of Managerial Economics; Professor of Operations. Maybe it's not enough cost savings. However, as China’s cost advantage decreased or levels of demand became more volatile and unpredictable, the relative value of dual sourcing would become negative and the company would be better off placing orders only with the plant in Mexico. “But to put a number on this split is incredibly hard. It’s certainly worth considering if you’re working towards a leaner, more efficient supply chain. If you’re like most US-based major manufacturing companies, you’re currently getting precision-made parts from China or another country. So the pair decided to create a middle ground and deliver a useful formula to the business community based on academic theory. Earning your SPSM® Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Executives may resist paying a premium for goods and services. This point is represented in Figure 2, where the “inventory cost” curve begins a steep vertical climb, pulling the “total cost” curve along with it as sourcing from China increases beyond roughly 75 percent. Factoring this into their calculations, Van Mieghem brought out what he called the “high-powered mathematical machinery.” He and Allon devised a formula that incorporated the per-unit cost advantage of using China, the fraction sourced from China, the risk of sourcing from China, the volume expected to be sold, fluctuations in demand, and the per-unit holding cost. Dual sourcing is cost neutral and provides a type of risk mitigation plan for your company. This article is the property of Next Level Purchasing and may not be copied or republished in any form without the express written consent of Next Level Purchasing. To single source means to use just one preferred supplier, despite there being multiple capable suppliers available. We are all familiar with the anecdote—historically accurate or not—of an apple falling on Isaac Newton’s head while he rested beneath the tree, jolting him to contemplate universal gravitation. We’ll also provide some insights into why US manufacturers should consider sourcing parts from American machine shops like ours. The consultants modeled the costs and benefits at five incremental points, ranging from securing everything from Mexico (0) to securing everything from China (100). Is the Sunk Cost Fallacy Actually Smart Business? Click here for the printer-friendly version. For example, if the per-unit cost advantage increased, the company would increase its sourcing of carbon fiber bicycle frames from China. Therefore, sourcing from the US is no longer prohibitively expensive when it comes to many CNC parts. Kellogg School of Management at Northwestern University. “This is a natural solution to split the constant and certain demand from the uncertain,” Van Mieghem said. Upon bid receipt, compute the cost of doing business with the two qualified suppliers who bid the lowest for the 70% and 30% chunks of your business. Due to automation and other productivity-boosting technologies, labor costs are generally cheaper than they used to be. Using the TBS policy, base inventory needs would be sourced from China while the plant in Mexico would be reserved for satisfying surges in demand, such as might occur after a Tour de France victory by a cyclist using one of the company’s bicycles. Van Mieghem (2010). We’d be happy to discuss how we can meet your manufacturing needs. And, sourcing within the US can help you cut shipping costs, take advantage of tariff benefits, and more.