Dual SourcingMarriott School of Management

By Chad Jensen

Overview

• What is Dual Sourcing (DS)?

• Types of sourcing

• How it works

• Advantages of DS

• Disadvantages of DS

Overview

• When to use DS

• Evaluation Criteria for DS

• Real life examples

• Dual sourcing exercises

• Summary

• Recommended readings

Dual SourcingDefinition

Using two sources (suppliers) when purchasing a product or service.

IllustrationDual sourcing

Suppliers Factory

Types of sourcing

• Single

• Dual

• Multiple

IllustrationSingle sourcing

Supplier Factory

Illustrationmultiple sourcing

SuppliersFactory

How do you Dual Source?

• Choose an additional supplier based on evaluation criteria.

• Split production between two companies

Product Allocation

• 50/50 split

• Primary & secondary suppliers

Who should use Dual Sourcing?

Any company with a need!

Advantages

Primary Advantage:

Minimizing risk

Advantages

Competition between two suppliers

Advantages

Reliability– Complex technologies– Quality of products

Advantages

New products, especially technological products

Disadvantages

Scale Economies

Disadvantages

Higher Costs

Disadvantages

Research & Development

Disadvantages

Contract Bid Collusion

When should you dual source?

When disruption from a sole supplier can cause business failure.

When should you dual source?

When it is easy and costs are low to switch sources.

When should you dual source?

For complex technology,

and new products.

When should you dual source?

When one supplier cannot produce the amount of product required.

Real Example

“A supply chain mishap threatened to spark a United States public-health disaster of gigantic proportions. Contamination at an overseas supplier held up 48 million flu shots — half of the nation's expected supply — and speculation briefly ran rampant. Would the flu season be as bad as last year's? How many people would get sick? How many would die? Would this alter the outcome of the presidential election?”

Real Example

“March, 2000: A lightning bolt struck a power line in New Mexico…The strike caused a fire in a production room at a Philips Electronics semiconductor manufacturing plant. … It stranded eight trays of valuable silicon wafers in a furnace… [the] sprinklers … caused water damage, … and contaminated millions of silicon chips. The factory initially figured it would lose a week of production, but in fact it lost months.

Ericsson's losses totaled $400 million… it has also withdrawn completely from the mobile phone handset production business.”

Evaluation Criteria

• Select a supplier that meets unsatisfied needs

• Estimate switching costs• Analyze

advantages/disadvantages• Evaluate using a cost/benefit

analysis

Case EvaluationDual Sourcing Decision

An auto body shop is deciding whether or not to use a second source for their body panel purchases. The body shop has had problems with shipment delays and backordered panels from their current supplier. The new suppliers panels cost more. Switching costs are minimal. Should the body shop use dual sourcing?

Case EvaluationDual Sourcing Decision

An auto plant is deciding whether or not to dual source its bumpers. The quality of the bumpers has declined and the cost of making the bumpers has steadily increased. The plant has been working with this supplier for 20 years. However a new supplier says that it can deliver a higher quality, and lower cost bumpers. The new supplier will need molds and technical support for the first 6 months costing $500,000. What should the auto plant do?

Discussion Question

How can dual sourcing be used in your company?

• In these areas what are the advantages?• Disadvantages?• What would be some possible problems with

implementation?• Use evaluation criteria.

Summary

Dual sourcing is a powerful tool for managing risk, and improving product

quality.

Recommended Readings

• Cranfield University (2002), “Supply Chain vulnerability.• Copland, T. and Antikarov, V. (2001), “Real options: A practitioners

guide”, Texere, New York, NY.• Dixit, A.V., Pindyck, R.S. (1994), “Investment Under Uncertainty”,

Princeton University Press, Princeton, NJ.• Lee, H.L., Wolfe, M. (2003), “Supply Chain Security without Tear”,

Supply Chain Management Review, Jan-Feb , pp 12-20.• Martha, J., Sunil, S. (2003), “Targeting a Just-in-case supply chain

for the inevitable next disaster.” Supply Chain Management Review, Sept-Oct, pp18-22.

• Prater, E., Biehl, M., Smith, M.A., (2001), “International Supply Chain agility- Tradeoffs between flexiblity and uncertainty.” International journal of operations and production management

Recommended Readings

• Webpages– “Letters to the Editor: Toyota's Solution,”

http://proquest.umi.com/pqdweb?did=23479148&Fmt=3&clientId=9338&RQT=309&VName=PQD, Asian Wall Street Journal. New York, N.Y.: Mar 14, 1997.  pg. 10 .

– Pochard, S., “Managing Risks of Supply Chain Disruptions”, http://ardent.mit.edu/real_options/Real_opts_papers/Master_Thesis-Sophie.pdf, Massachusetts Institute of Technology.

– Bartels, A., (2003) “Deciding When to Single-Source or Dual-Source a Technology”, http://www2.cio.com/analyst/report1829.html, Analyst Corner.