Dual Source vs. Single Source
PurchTips edition #134
Should You Dual Source Or Single Source?
To dual source means to use two preferred suppliers to provide the same product or service. To single source means to use just one preferred supplier, despite there being multiple capable suppliers available.
Many purchasers decide to single or dual source prior to issuing an RFP or tender based on certain assumptions. Common assumptions are that there is a lower cost with a single source due to you leveraging your volume but less risk with a dual source due to having a qualified supplier up and running if the other fails to perform.
Those assumptions may be right sometimes but, as a professional, you should make decisions on facts, not assumptions. To acquire facts, request three prices from your suppliers: (a) for 100% of your business, (b) for 70% of your business, and (c) for 30% of your business.
Upon bid receipt, compute the cost of doing business with the two qualified suppliers who bid the lowest for the 70% and 30% chunks of your business. Compare that cost with the lowest qualified single source bid. Is there a cost difference between the single and dual source options? If so, does the lower risk justify the premium?
I must close this article with these caveats:
- Executives may resist paying a premium for goods and services. If they need to be sold on the concept, compare it to buying insurance - expending funds to protect your company from the unexpected.
- A dual source situation can have disadvantages beyond just a higher cost. Consider any potential problems from inconsistencies in quality or the extra work involved in managing two suppliers.
- For simplicity, I used price as the only decision criterion above. Make complex supplier decisions on a total cost of ownership basis, considering quality, delivery, service, and other variables.
- Keep in mind that just because you contract with a single source doesn't mean that a non-contracted supplier won't be available if you might need one.
- Why might one of the dual source suppliers fail? Could any such reason cause both to fail at the same time? If so, dual sourcing may either (a) not truly reduce your risk and/or (b) work well only if you choose suppliers with materially different traits.
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Copyright 2007. This article is the property of Next Level Purchasing and may not be copied or republished in any form without the express written consent of Next Level Purchasing.
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By Charles Dominick, SPSM, SPSM2, SPSM3
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