Global supply chain disruptions in recent years highlighted the dangers of relying on a single-sourcing strategy. And, with rising inventory demands putting pressure on suppliers, companies have been forced to rethink their sourcing strategies and inventory policies to improve their supplier risk management.
As a result, supply chain leaders are overwhelmingly shifting to multi-sourcing strategies today. In fact, McKinsey found that 81% of survey respondents (taken from a sample of 113 supply chain leaders between March and April 2022), say they’ve implemented dual sourcing strategies in the past year-up from just 55% in 2020.
A changing risk landscape
Relying on only one supplier for critical inventory means that any disruption in that supply-like a global pandemic-could cause a chain reaction that delays or disrupts operations across the company. In other words, a single-sourcing supply strategy concentrates supplier risk. By sourcing inventory from two or more suppliers, companies can spread that risk across multiple channels so that if one supplier experiences disruption, the company can more easily shift demand to their other suppliers to ensure seamless operations.
Not only do single-source supplier strategies pose risks, but inventory demands are also changing forcing supply chain leaders to adapt. Between 2018 and 2021, inventories increased by an average of 11%, with the largest increases in the high-tech and commodity sectors. Multi-sourcing strategies are an effective way to meet increased demand for supply. By spreading demand across multiple suppliers, companies can reduce risk of inventory shortages and more easily adjust sourcing orders to meet fluctuating demand.
Weighing the pros and cons of a multi-sourcing strategy
If you’re assessing your sourcing strategies, it’s important to weigh the potential advantages and disadvantages of single vs. multi-sourcing policies.
Multi-sourcing supplier strategies can give companies a competitive advantage by improving
- Risk reduction
- Scaling opportunities
With contracts spread across two or more suppliers, companies reduce the risk of bottlenecks due to supply chain disruptions, enabling them to manage supply reliably. Additionally, multi-sourcing can improve efficiencies and lower costs due to greater leverage in negotiations. This can free up companies to innovate and scale with greater flexibility because they are no longer reliant on one supplier to meet their needs.
While dual or multi-sourcing approaches are growing in popularity for good reason, it’s important to recognize some of the drawbacks. For instance, multi-sourcing strategies often require more internal resources to manage multiple relationships, and can limit the time companies can invest in each supplier relationship. Additionally, lower order volumes across more suppliers can reduce bargaining power with suppliers-potentially increasing costs.
These are all valid “cons” that procurement managers and leaders must weigh. But even if you don’t sign contracts with multiple vendors for the same goods or services, you should at least have a sourcing “contingency” strategy in place in the event an alternative supplier is needed.
How to Improve Your Multi-Sourcing Strategies
A multi-sourcing strategy alone isn’t enough to ensure resiliency throughout your supply chain. In order to take advantage of the benefits of multi-sourcing, you need the right strategies, policies, and tools in place.
Access holistic intelligence based on high-quality data
Good data is essential to supplier risk management. Holistic supplier intelligence can help companies understand their risk landscapes, identify potential disruptors early, and take action quicker. According to McKinsey, supply chain leaders with high-quality data are 1.5 times more likely to report no challenges due to 2021 supply chain impacts.
Traditionally, companies have collected supplier data through surveys. But objective, third-party verified data is not gained from subjective supplier surveys. Not only are surveys biased in favor of the supplier-which can mask potential risks-but surveys are also periodic, and can’t deliver real-time insights. Instead, you need a broad set of premium data sources that specialize in various risk domains, such as cybersecurity, ESG, financials, etc.
That’s where supplier intelligence platforms comes in.
Using machine learning models, a robust supplier intelligence solution can take a wide range of data and transform it into actionable insights.
With that data, you can also conduct more accurate n-tier mapping to better understand your supplier landscape. For instance, at first glance, you might think you have strong supplier diversification. But if your tier 1 suppliers all source key materials from the same source, that can pose a risk if that second tier supplier is disrupted.
N-tier mapping is a critical part of a strong risk management strategy. Yet, 98% of suppliers don’t have a good picture of their supply chain to the third tier or beyond.
Invest in digital transformation to improve integration and break down data silos
One of the biggest challenges to leveraging supply chain data is consolidating it into one centralized platform. Many organizations still rely on siloed tools and legacy systems that don’t easily work together or share data. This disconnection causes data blindspots that impact the efficiency and effectiveness of your supplier risk management.
That’s why it’s important to invest in digitalization to improve integration across your ERPs and enterprise systems. With a centralized network and digital dashboards, you can achieve end-to-end visibility across your supply chain. McKinsey found that companies that do this were twice as likely as others to avoid supply chain problems.
Prioritize cloud-based enterprise apps that integrate with your ERP as well as with other systems your team, including procurement and category managers, need to stay up-to-date on commodity price fluctuations, ransomware attacks, and more.
Pro Tip: Look for supplier intelligence solutions that include collaboration capabilities that allow seamless cross-functional communication with internal stakeholders from one central workspace.
Streamline onboarding and supplier risk evaluation processes
A multi-source strategy isn’t just about adding more suppliers to your roster. Each supplier should be carefully vetted to ensure your supplier network is resilient and diverse. This includes not only strengthening your risk evaluation processes but also improving supplier onboarding and management.
For instance, during the onboarding process, it’s important to clearly outline expectations and contractual obligations, such as ESG policies. Communicate your intentions and standards throughout the onboarding process as well as in surveys and assessments afterward for ongoing education.
By communicating openly upfront and implementing a robust, standardized onboarding process, you can significantly reduce risks and ensure a healthy long-term supplier relationship.