The ties that bind
Dual sourcing can protect the supply chain
Supply chain management always is a concern for manufacturers. One hurricane or earthquake can break the chain and cause a disruption or, even worse, a complete shutdown.
If you’re using a global supply chain, the risk is even higher. Natural disasters aren’t the only risk. Political upheaval and labor or material shortages also can sever the chain. One option to mitigate your risk is dual sourcing — using multiple suppliers (local and global) for the same components.
Know your options
When using multiple suppliers, secure option contracts that allow you to order what you need from each supplier during the year. The contracts should specify prices and set certain capacity limits or minimum quantities per order, but you shouldn’t be required to place any orders.
Instead, you’re reserving capacity from the suppliers — which probably will be reflected in up-front unit costs. You’re also, to some extent, sharing the risk with your suppliers: They risk being left with too much product while you risk not having enough. Thus, be careful in determining how much capacity to reserve from each.
In deciding capacity, try to predict the likelihood that you’ll see a supply chain disruption during the year. Obviously it’s difficult to forecast natural disasters, but you can look back to see whether a certain company or country is subject to material shortages, labor unrest, regulatory delays or shipping problems.
To a certain extent, you may even be able to assess the probability of a natural disaster. For example, suppliers in the South Pacific are more likely to suffer hurricane damage than those in the North Sea.
If it’s unlikely that your supply chain will be disrupted, consider relying on only foreign suppliers. Disruption costs won’t be high enough to offset the higher profits you’ll see with lower cost components.
Conversely, if the risk of disruption is significantly high, you’d be wiser to shift most of your orders to local suppliers. The higher prices may still not be as high as your disruption costs.
Balance cycles
During a moderate risk cycle, you have the option of using both local and foreign suppliers fairly equally. The challenge is in determining how to do so effectively. Local suppliers can be more responsive to your business fluctuations, while offshore companies typically offer better pricing but need longer lead times.
Order first from the local, faster supplier to get inventory up and then from the slower global supplier to maintain it. The difference in lead times means you’ll use alternating on-hand inventory to fulfill your orders until the next order in the supply cycle arrives.
Take notes
Even if you don’t use foreign suppliers, dual sourcing may help make your supply chain more reliable. In either case, however, you need to set up and manage contracts with care, and keep an eye on cost/benefit ratios.
For more information about our services to inventory based businesses,
Contact: Mark Walker, Partner, Director of Inventory Based Businesses Practice at 817.882.7724.
The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.