Is Single-Vendor Sourcing Still the Way to Go? Assessing Vendor Risk

Single-Vendor Sourcing has been a strategic go-to for many years, offering companies stronger collaborative relationships, easier relationship management, stronger supplier response and greater cooperation in production/logistics synchronization and sharing of data.

But Joshua Nelson, The Hackett Group’s Director in the Strategy and Operations Practice, recently suggested that single-vendor might not always be the best sourcing strategy.

Globalization, for instance, may increase the risk brought on by a single-source strategy, he pointed out: single-vendor sources are often foreign, and as such can introduce intellectual property risks, financial risk from foreign exchange fluctuations, and political instability – risks that are all mitigated by a multi-vendor sourcing approach.

Some companies, like Pricewaterhouse Cooper, eschew single-vendor sourcing altogether, implying that a one-size-fits-all strategy may not exist, and that there are scenarios where vendor sourcing is an open question.

Nelson suggested that a strong discriminator for choosing between single- and multi-vendor sourcing may be the degree of dependency between partners. He described “lopsided dependency,” in which the relationship is not a symmetrical one: both sides will tend not to respond consistently with behaviors that are mutually beneficial, because one partner is far more powerful than the other and has far less at stake in the relationship (Walmart is a classic example).

When the partnership is lopsided in favor of the supplier, the buying partner must live with it when capacity shifts result in reducing the buyer in priority. When the partnership is lopsided in favor of the buyer, demand shifts can leave the supplier unable to respond quickly enough, increasing financial pressure and threatening stability.

Both of these scenarios are mitigated by a multi-vendor sourcing strategy, Nelson concluded. Where a partnership is “lopsided,” multi-sourcing is safer all around.

When dependency is mutual, however, and both partners consider the relationship of high importance, the supplier is more responsive and flexible when demand changes, and both sides are motivated to keep costs low and quality high. In this scenario, single-vendor sourcing makes more sense.

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Lean supply chain, Pt. 4: resource planning in parallel

Manufacturing resource planning is increasingly essential to lean supply chain efficiency. But having MRP in place may be only a partial measure.

Process expert Jakob Bjorklund has suggested that, while having MRP in place is certainly a step toward operational efficiency in manufacturing, it can often take the enterprise only halfway as far as it might go.

“Even as companies try to focus on the disciplines normally associated with the idea of a lean supply chain,” Bjorklund said, “another fundamental paradigm shift that must take place within their organization, and it is often overlooked.”

That paradigm shift involves re-thinking the points at which manufacturing operations commit, keying ever more closely on demand. When demand is stable and highly predictable, “make-to-stock” (MTS) is a model that works well: resource planning is simple when demand is flat. Raw materials may be ordered in large, inexpensive quantities, because the timing of their use is easily established.

The problem, said Bjorklund, is that it seldom works out this cleanly in the real world. Even when some demand is flat, it is more typical that a significant portion of any manufacturer’s products will be ordered with fluctuating frequency, rendering a “make-to-order” (MTO) model more advisable.

His take-home point is that it makes sense to simply run both planning processes in parallel: identify flat-demand patterns and plan manufacturing resources for those products accordingly, but implement MTO planning for those products where customer demand requires more agile responsiveness.

“By continuously analyzing demand patterns and inventory turns, the point of postponement can be changed over time to achieve the optimal balance between efficiency and responsiveness,” he said.

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Lean supply chain, Pt. 3: accountability in demand forecasting

Demand forecasting is problematic for a number of reasons, but its importance in the lean supply chain is obvious. Getting control of the forecasting process may require a re-thinking of who is contributing to the process within the enterprise and how various contributors approach forecasting.

Process and planning expert Jakob Bjorklund has suggested that one issue that may compromise the accuracy of demand forecasting is accountability for the process.

“It is imperative,” he said, “that a manufacturing enterprise assign demand forecasting to an independent party within the company that has more of a holistic point of view than would sales, manufacturing or any other specific department.”

Increased demand forecasting accuracy means lower inventory levels and enhanced customer service, he said, and those are very desirable goals – but in pursuit of those goals, many companies disseminate responsibility for demand forecasting across all of the departments it affects. This is an innocent mistake, but it can introduce error in forecasting.

In Bjorklund’s example, demand forecasting in the hands of the sales department may lead to overly optimistic projections; manufacturing operations, on the other hand, may introduce overly cautious projections, erring on the side of conservatism.

Getting everyone’s input into the process is not a bad thing in itself, he said, but in the end, no single individual or department ends up being accountable for the accuracy of the demand forecasting process, and this is a problem: “It is not surprising that, as a result, this crucial role tends to fall between chairs in many enterprises,” he said.

Identifying a proper accountable authority within the company to master and monitor demand forecasting, he said, is a crucial component in improving forecasting accuracy.

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Lean supply chain, Pt. 2: harmonizing customer service with manufacturing

Every manufacturer strives to cultivate efficiently – yet responsiveness to customers is equally important. ERP expert Jakob Bjorklund has pointed out that these two imperatives can often be in conflict.

It is common, Bjorklund noted, for manufacturers to produce in very large quantities, which, despite creating the challenge of storing surplus product, can generate efficiencies in raw materials purchases, optimum performance from manufacturing hardware, getting the most from personnel, and so on, yielding the lowest-possible cost-per-unit on product. However, this kind of dedication to efficiency can cause scheduling of manufacturing to synchronize with supplier schedules, rather than consumer demand.

Decoupling from consumer demand, he said, can cause manufacturing to respond poorly to periodic fluctuations in consumer needs; in effect, the goals of manufacturing operations can come into direct conflict with the goals of the sales organization. Commitment to high-volume production can cause availability of some products to slip, due to inventory shortages tied to the production schedule.

Bjorklund proposed that compromise is the key to reconciliation in this scenario, and that the benefits to customers outweigh the cost of supporting some manufacturing inefficiency.

“Going forward, manufacturing would not be making unilateral decisions about batch sizes and production schedules, circumventing their natural tendency to focus on manufacturing efficiency,” he said. “Instead, they would now be obliged to produce only enough to cover a certain period of time based on the sales projection. That means that every product will now be produced more frequently and in smaller batches.

“To encourage this behavior, other metrics and KPI’s can be introduced that are more holistic and based on customer service levels and inventory turns, rather than just production output. The higher the speed through the supply chain, the higher the inventory turns and the less capital tied up in inventory at any given time. At the same time, the faster the raw materials move through the supply chain, the less obsolescence you have and less expired materials you have.”

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