The Problem With Having Multiple Suppliers
A traditional method for reducing the cost of purchased parts is to put them out to bid, thereby forcing suppliers to bid against each other to offer the lowest price. This also gives a company a designated backup supplier, in case there are problems dealing with the primary supplier.
However, the primary focus on obtaining the lowest prices also has the following negative effects:
- Products may be of lower quality
- Deliveries may be delayed
- Extra time by the purchasing staff to monitor bidding situations
- Lower-volume purchases from each supplier, which tends to drive costs higher
Sole Sourcing Materials
Given the considerable number of problems with having multiple suppliers, it may be better to instead sole source purchases with a much smaller number of core suppliers. Doing so has the following advantages:
- The supplier can be screened in advance to ensure high product quality
- Deliveries are more reliable, since the supplier wants to preserve a long-term relationship
- There is minimal purchasing paperwork required to place orders, since there are no bids
- Order volumes can be increased, resulting in volume discounts
- Less time required to monitor suppliers, since there are fewer suppliers
- Long-term suppliers are more likely to agree to just-in-time deliveries
- Long-term suppliers are more inclined to participate in joint product development teams
In cases where key components are involved, it may still be necessary to designate a backup supplier, but in most cases the advantages of sole sourcing far outweigh the use of multiple suppliers.
When engaging in sole sourcing, be sure to devise a reporting system for evaluating the quality, prices, delivery times, and other factors for each supplier, to see if the company is obtaining sufficient service from each one.