Are more suppliers a good thing for your business? It’s a difficult question to answer and one that throws up several conundrums for risk management.
On the one hand, if you have multiple suppliers you reduce dependency on one source and balance out risk. So, for example, if disaster strikes one supplier, you can re-route through another. Joshua Nelson, director in the strategy and operations practice at the Hackett Group, cited this in Spend Matters as a key reason for supplier diversification. However, on the other hand, Mr Nelson explained that with one supplier, a buyer is more likely to enjoy greater bargaining power, improved transparency, simpler performance tracking, easier relationship management, improved innovation and design collaboration, enhanced plan synchronisation and information exchange, and better supplier responsiveness.
While the pro list for a single supplier strategy is longer, it’s important not to underestimate the importance of reduced dependency. Business depends on a smooth flow of products or services through the supply chain and when this is disrupted due to capacity constraints, financial complications, quality issues or natural disaster, a company can soon be crippled.
Relationships with suppliers have become more important than ever and The Hackett Group found that in 2014, tapping into supplier innovation was ranked as the second highest priority for procurement leaders. Indeed, 69 per cent of those surveyed cited this, showing how the focus is slowly moving away from purely cost concerns.
However, as the ability of suppliers to drive innovation becomes more focal, dependency grows, especially when buyers have just one supplier. This can lead to what Mr Nelson calls a ‘lopsided dependency’ – when a buyer is highly dependent on a relationship that the supplier holds in low importance. When this happens, suppliers are unlikely to respond to buyer issues swiftly or offer the best deals. Of course, this dependency can work the other way, i.e. the supplier is dependent on a relationship that the buyer holds in low importance.
When a supplier is overly dependent on a buyer, the latter is also at risk if there is a single sourcing strategy in place. Mr Nelson explained in Spend Matters that when a supplier is overly reliant on a contract, it may not have the resources to scale up or down when needed, or reduce lead times. What’s more, when trouble occurs, a lack of resources may make it difficult for a supplier to respond in an appropriate timescale.
Mr Nelson claims this is when a multiple sourcing strategy is often the best strategy, in order to spread demand across multiple suppliers. However, the ideal scenario is always that there will be mutual dependency between buyers and suppliers.
When it comes to choosing between single and multiple sourcing strategies, it may not be a case of one being better than the other. Often the decision is more about what suits the needs of the individual category and business.
Mr Nelson told Spend Matters that when choosing a strategy, buyers need to look at their supplier relationship dependencies and possible risk scenarios. This is a matter of supplier management and companies need to get it right in order to create a resilient supply chain.
At Achilles we can help buyers make a decision between single or multiple vendors by providing validated supplier information within an industry-specific online community. Using our supplier management solution we offer an efficient approach to buyers to manage risk, by validating and maintaining information on suppliers.