Strategic Guide for Supplier Management: How Many Suppliers Should You Work With?


 Managing suppliers for each commodity can significantly impact a company's costs, risks, quality, and relationships. In this blog, we'll explore strategic approaches to maintaining different numbers of suppliers in an intuitive and engaging way. This guide aims to help purchasing managers develop long-term strategies, complete with real-world examples for easy understanding.

Single Sourcing Strategy: Leveraging the Power of One Supplier

A Single Sourcing strategy involves contracting with just one supplier for a specific commodity. This approach is ideal for situations where building a strong, close relationship with a supplier can enhance quality and technical capabilities. It is particularly suitable in the following cases:

  • When high-level technology or patented products are required

  • When a long-term trust relationship with the supplier is important

  • When expecting cost reductions through large-volume purchases

For example, Tesla collaborates closely with Panasonic for its battery supplies, leveraging Single Sourcing to achieve stable supply and cost reduction. This kind of approach deepens the relationship with the supplier and optimizes both quality and costs. Moreover, through patents or long-term supply contracts, companies can reduce costs and use strategic partnerships to negotiate and optimize cost structures. However, there are significant risks in this approach, such as if the supplier faces bankruptcy or a disaster. In such a scenario, there would be no alternative source, which could cause serious supply chain disruptions. For instance, if Panasonic encounters production issues, Tesla could face major setbacks in battery supply. Therefore, it is crucial to continuously monitor the financial health and production capabilities of the supplier and establish a crisis response plan.


Dual Sourcing Strategy: Balancing Risk and Cost

Dual Sourcing is a strategy where two suppliers are secured for a single commodity. This approach balances cost savings and risk mitigation effectively.

  • Competition between suppliers can be used to negotiate favorable terms for quality and pricing.

  • If one supplier encounters issues, it is possible to quickly switch to the alternative supplier, enhancing supply chain stability.

For example, Apple signs contracts with two suppliers for key components, effectively mitigating risks. If one supplier faces issues, Apple can immediately turn to the other, preventing disruptions in production. With Dual Sourcing, it is important to ensure adequate volume allocation to maintain cost competitiveness and risk reduction simultaneously. However, maintaining equal trust with both suppliers is crucial, and managing this often involves adjusting supply volumes or transferring technology to balance both suppliers effectively.

Multiple Sourcing Strategy: Diversity for Flexibility

Maintaining four or more suppliers for a commodity is a Multiple Sourcing strategy that aims to maximize market diversity and supply stability. This strategy is especially common among global companies looking to minimize supply chain risks in specific regions.

  • Maintains market competitiveness and allows for more flexible negotiations.

  • Mitigates regional risks (e.g., natural disasters, political issues) through supplier diversification.

A popular approach within Multiple Sourcing is the 2+2 strategy. This strategy allocates 80% of the volume to two primary suppliers and 20% to two new suppliers. For instance, BMW contracts with multiple suppliers worldwide for major components. Of this, 80% is given to stable suppliers, while 20% is allocated to newer suppliers to reduce risks and create price competition. This way, BMW reduces risks while leveraging volumes to maintain cost competitiveness. However, managing relationships with multiple suppliers requires significant management costs, and continuously comparing and managing each supplier's quality and pricing can be a challenge. Maintaining standardization across suppliers also becomes a major issue.


Conclusion

Supplier management goes beyond merely maintaining the supply chain; it impacts cost savings, risk management, and quality assurance, ultimately influencing company performance. Therefore, when deciding the number of suppliers for each commodity, companies need a strategic approach that considers business goals, market conditions, and risk factors. Single Sourcing enables deeper collaboration, Dual Sourcing minimizes risks while encouraging competition, and Multiple Sourcing increases supply stability and flexibility. Understanding the strengths and weaknesses of each strategy and applying them in the right context is key to effective supplier management.

Dear purchasing managers, I hope this guide helps you leverage each strategy to achieve your company's objectives. By examining real-world examples, you can see how these strategies can be applied in practice. May this provide valuable insights for your supply chain management endeavors.

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