Back in September, I wrote the PurchTips article “Dual Source vs. Single Source” to make some suggestions to help determine whether dual sourcing or single sourcing was a better alternative for a contract.
Specifically, I wrote: “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?”
Since then, I’ve gotten some questions that have made me wish I was more specific how to do that comparison. To do that comparison, you have to identify the total cost of all possible combinations.
For example, if you had three suppliers bidding, your combinations would be:
- 100% to Supplier A
- 100% to Supplier B
- 100% to Supplier C
- 70% to Supplier A + 30% to Supplier B
- 70% to Supplier A + 30% to Supplier C
- 70% to Supplier B + 30% to Supplier A
- 70% to Supplier B + 30% to Supplier C
- 70% to Supplier C + 30% to Supplier A
- 70% to Supplier C + 30% to Supplier B
The more bidders you have, the more combinations you have. But the bottom line is to make sure you’ve identified all of the combinations and have computed total costs for each combination.
If your number of suppliers and/or distribution percentages get bigger or more complicated, then it may be time for you to consider investing in sourcing and supply chain optimization software.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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