If Multi-sourcing is a Best Practice, Why Are so Few Companies Doing It?

Because of the pandemic, risk management surrounding sourcing has become top of mind in many supply chain organizations. One best practice in this area is to identify and qualify alternate suppliers. Companies need to ensure they have alternate sources of supply that can ramp up to the volumes needed. This best practice urges companies to examine not just the cost of the sourced products, but also to understand the risks associated with not multi-sourcing key components.

Research by APQC shows that there is much room for improvement in this area.  Only thirty-one percent of companies have developed alternate sources of supply for 70% or more of their Tier 1 suppliers. APQC is a nonprofit organization focused on benchmarking, best practices, performance improvement, and knowledge management. What makes the APQC data so valuable is the large pool of respondents – there were 638 respondents for recent procurement and supplier risk management benchmarking research – and the rigorous process they go through to validate this Open Standards Benchmarking data.

multi-sourcing

Too Few Companies are Engaged in Multi-sourcing
Source: APQC “Supplier Risk Management: Current State Practices Report

Sometimes the ability to find alternative sources of supply can happen very quickly. Bob’s Discount Furniture, a furniture retailer, had followed the news on the potential for higher tariffs on goods sourced from China closely. They were able to shift 25-30% of their sourcing of furniture out of China in three to four months at the beginning of 2019.

Data from Descartes Datamyne shows that following the 25% January 2019 tariffs imposed on Chinese pneumatic tires made of rubber – car tires –that China lost 65% of its US tire import volume in 15 months! That’s almost13,000 shipping containers – twenty-foot equivalent unit (TEUs). China went from being the second largest exporter to the US for this item to the fourth largest. Descartes Datamyne has a comprehensive, searchable database of import-export information covering over 75% of the world’s import-export trade.

Imports and Multi-sourcing

Source: Descartes

How was trade able to shift so quickly? There were plants in many other nations that were already able to produce this commodity. Clearly, there also had to be excess capacity or the ability of existing manufacturers to quickly scale capacity.

But in other instances, the ability to switch suppliers, and build an alternative supply chain, can take a long time. In March of 2011, a tsunami triggered the Fukushima Daiichi nuclear disaster in Japan. The Renesas Electronics plant in the tsunami-affected part of Japan made 40 percent of the world’s supply of microcontrollers used in the automotive industry. A microcontroller plays a critical role in controlling a car’s engine. There are places where companies have flexibility – where they can divert parts from one plant to another or look to get substitute parts from other suppliers – and places where flexibility just does not exist. Companies hate holding “just in case” inventory, but in some cases it is necessary.

The tsunami/nuclear disaster caused several automotive OEMs to look closely at their sourcing and risk management practices. General Motors learned that their business continuity plans at their plants were too “tactical.” Six weeks after the disaster GM was still finding suppliers located within the affected area. Supply chain risk management subsequently became strategic at GM with their CEO having regular meetings with the strategic risk department. GM has worked to inculcate risk-based thinking not just internally, but among their suppliers. The company implemented a cutting edge digital advance warning system. And by 2016 the company’s capabilities were advanced enough that when a 7.0 earthquake struck below Kumamoto City in Japan, within 6 hours GM understood the supplier impacts from that quake.

AGCO provides another example of how long it takes to build robust strategic sourcing capabilities. AGCO, a global agricultural equipment manufacturer, has performed spectacularly well during this pandemic. But their ability to respond so well in the current crisis is based on a lengthy journey. Multi-sourcing ramped up starting in 2008. AGCO needed to teach buyers that sourcing is about more than costs. Risk needed to be considered.  If something goes wrong, what is the cost to remedy that situation?  If quality is bad, how fast can AGCO respond? AGCO admits that It was difficult to teach their people that.

For many types of components, it can be a long journey to qualify vendors and then get them to the kind of product quality, delivery performance, upside responsiveness, corporate responsibility, and risk management capabilities that are desired. For custom engineered supplier components, a manufacturer is doing well if they are satisfied with the performance of that new vendor after a year of collaborating with them closely.

But the first part of the journey, identifying potential vendors to work with, is much easier if companies are using the right tools. The Descartes Datamyne solution is a great tool to identify what suppliers a company’s competitors are using, and even, in some instances, what the competitors are paying their suppliers for the products they are purchasing.

For many companies, the realization that they should be doing more multi-sourcing has occurred too late to respond well in the current environment. Still, getting started now will help them respond better to their next large supply chain disruption. Further, this pandemic illustrates that multi-sourcing, if it the new sources are in the same region or nation, does not provide as much risk protection as companies may think.

 

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