There are different schools of thought when it comes to sourcing products from suppliers. Businesses are facing the dichotomy of single-sourcing vs. multi-sourcing strategies now more than ever. Today, driving optimized costs, quality, and turnaround times remain the north star for all supply chain managers, and multi-sourcing is fast becoming the best approach to move towards the supply chain north star. This article reviews both strategies – multi-sourcing and single-sourcing – and provides recommendations on effectively executing a multi-sourcing strategy.
Defining Single-Sourcing and Multi-Sourcing
To fully understand both processes, we need to start by defining both terms.
Single-sourcing: The age-old concept of economies of scale. Single-sourcing is the strategy of passing all purchase orders for a particular product to one supplier. By buying in bulk, consistently, from one single vendor, theoretically, a business can benefit from better costs, quality of service, quality of the product, and payment terms.
Multi-sourcing: As global economies grow more and more advanced, you can make pretty much source any product on any continent. With seemingly infinite production options for most industries, multi-sourcing is a strategy that leverages a large pool of suppliers to satisfy business needs.
Optimizing Single-Sourcing Post-Pandemic
If your business relies on one primary supplier for your main products, COVID likely has completely halted your production facilities at one or several points over the last year. Depending on the timing of your buys, you may have made it through just fine, or you may have needed to make some challenging pivots. As we think about the global supply chain from a 30,000ft view, pre and post-pandemic, businesses get superior pricing by routing higher volume orders to a single vendor. The concept of economies of scale has not and will not change. For this reason, timing your buys and meticulously planning quantities will always be an effective strategy to drive margins. That said, when building longstanding partnerships with suppliers, how can you be sure that the grass isn’t greener elsewhere? According to Forbes, only 31% of companies have developed alternate supply sources for 70% or more of their Tier 1 suppliers.
You may be satisfied with your current margins and suppliers who drop the unit price by 1-2% each year. However, as our global economy continues to face disruptions, new suppliers are popping up to take innovative approaches to produce the products you sell. If you stick with the same suppliers for decades, how do you know there aren’t alternative suppliers making the same quality product faster and at lower costs?
Transparent annual cost/benefit analysis is the best way to optimize single-sourcing post-pandemic. Whether your business has been purchasing from the same vendor for one year or 100 years, at the end of each buying season, it is critical to conduct two types of evaluations:
- Ways to drive superior margins/product quality with existing suppliers
- Ways to drive superior margins/product quality with new suppliers around the globe
When conducting these evaluations, it is essential to share your ACTUAL target prices with new suppliers, approximate current margins and costs, and weaknesses with your existing supply chain partnership. While doing this, simultaneously request that your active vendors evaluate their processes and pricing to determine if their offering can be more competitive. If you are displeased with the pricing, turnaround times, and capacity your current vendors offer, be forthcoming. Good vendor relationships thrive from honesty, and if you find better pricing from other partners, share this with your existing suppliers. Transparency and being proactive about seeking annual improved efficiency even when sticking with your current vendor will enable you to optimize your single-sourcing strategy.
Why Multi-Source? Why Now?
COVID restrictions and factory shutdowns and tariffs and trade-wars driven by geopolitical uncertainty are currently impacting global supply chains – and they are presently driving lots of supply chain pivots. While APQC research tells us a high percentage of businesses do not actively have effective multi-sourcing strategies, a 2021 Gartner study tells us that companies are very actively investing in more profound and more collaborative supplier relationships. According to the Gartner report, 77% of companies said they are investing in the short term for supplier relationship and resiliency. Additionally, the World Bank and IMF analysis report that the coronavirus crisis has disrupted 51% of organizations’ supply chains for 3-6 months. They also report that another 17% of organizations will take 6-12 months for their supply chains to recover.
Tariff Impact Example
To show all of these strategies in practice, let’s take the example of what happened when the US government imposed new tariffs on Chinese imports. In January 2019, following the 25% tariffs imposed on Chinese pneumatic tires made of rubber – car tires – China lost 65% of its US tire import volume in 15 months.
Examples of how to Diversify your Vendor Network
- South-East Asia + nearshoring: South-East Asia seems to most consistently deliver low-cost, high-volume production options for the foreseeable future. Relative to the rest of the world, you can generally produce most consumer products at better margins in Asia. However, Asia is far from North America, and so speed to market extends by several months. Vast geographic distances for shipping lead to higher costs. To overgeneralize, Asia factories also prefer dealing in higher quantities to gain access to really great margins. Very different from Asia, nearshoring from LATAM is excellent for faster turn arounds, higher quality, and lower cost shipping. Because it is closer, goods can come in faster, and you can more effectively execute quality checks as production is in a similar time zone and just a short flight away. Having a nearshoring option and a primary low-cost Asia production option is an excellent strategy for many industries.
- Asia – China + other: Chinese factories are incredibly diverse in their skillsets and machinery, and as such, you can make most everything in China. That said, other countries in Asia have great manufacturing services at competitive prices. Thailand, for example, is very strong in rubber, automotive, gold, and jewelry production. Taiwan also has great textile capabilities for fashion and soft goods consumer businesses. Vietnam, on the other hand, specializes in electronic manufacturing due to Pansonic and Samsung.
Trialing & New Vendor Onboarding
In many industries, there is a relatively cumbersome process to onboard new vendors. For example, new vendors need to go through pre-production processes like initial samples, fit samples, lab dips, and rigorous QA for initial runs in the apparel space. For plastics or product categories involving mold making, molds can cost $50kUSD+. That said, as our world continues to evolve, there will be continuous economic shifts where various nations and economies become best-fit options for a specific production. Ensuring you always have 2+ vendors for your tier 1 products is a good place to start, along with an annual audit exercise to future-proof your business. Then follow by identifying categories/SKUs/styles where you know there are weaknesses in your vendor network.
Economies of scale is a concept that will always ring true – the more business you give a vendor, the lower the cost. That said, the global economy does not allow companies to have the luxury of relying on a single partner without issues. Therefore, investing time and energy into diversifying your supply chain will lead you to see that the grass will always get greener on some other side. The more continuous your vendor review process is, the more competitive and risk-averse your business will be in our ever-changing world.
The GRID’s Global Sourcing Network allows companies to take a multi-sourcing approach powered by next-gen technology and analytics. Learn more about why the top retail businesses trust the GRID’s GSN to diversify their vendor networks.
Bobby Hamill is the VP of Sales at Suuchi Inc. With over five years experience at Netsuite, Bobby leads the Suuchi team to help hundreds of businesses take the first step to a digital future for their supply chains. Learn more about Bobby.