dual sourcing

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Dual SourcingMarriott School of Management

By Chad Jensen



Over view

What is Dual Sourcing (DS)? Types of sourcing

How it works

Advantages of DS Disadvantages of DS



Over view

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 productor ser vice.



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 onevaluation 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 betweentwo suppliers



Advantages

Reliability

± Complex technologies ± Quality of products



Advantages

New products, especiallytechnological products



Disadvantages

Scale Economies



Disadvantages

Higher Costs



Disadvantages

Research &Development



Disadvantages

Contract Bid Collusion



When should you dual source?

When disruption from asole supplier can

cause businessfailure.




When it is easy and costs arelow to switch sources.




For complex technology,

and new products.




When one supplier cannot produce the

amount of productrequired.



Real Example

³A supply chain mishap threatened to spark a

United States public-health disaster of giganticproportions. Contamination at an overseassupplier held up 48 million flu shots ² half of thenation's expected supply ² and speculationbriefly ran rampant. Would the flu season be as

bad as last year's? How many people would getsick? How many would die? Would this alter theoutcome of the presidential election?´



Real Example

³March, 2000: A lightning bolt struck a power line in New

Mexico«The strike caused a fire in a production room ata Philips Electronics semiconductor manufacturing plant.« It stranded eight trays of valuable silicon wafers in afurnace« [the] sprinklers « caused water damage, «and contaminated millions of silicon chips. The factoryinitially 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withdrawn completely from the mobile phone handsetproduction business.´



Evaluation Criteria

Select a supplier that meetsunsatisfied 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 touse a second source for their body panelpurchases. The body shop has had problemswith shipment delays and backordered panelsfrom their current supplier. The new supplierspanels 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 bumpershas declined and the cost of making thebumpers has steadily increased. The plant hasbeen working with this supplier for 20 years.

However a new supplier says that it can deli

ver a higher quality, and lower cost bumpers. The

new supplier will need molds and technicalsupport 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 withimplementation?

Use evaluation criteria.



Summary

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

quality.



Recommended Readings

Cranfield University (2002), ³Supply Chain vulnerability.

Copland, T. and Antikarov, V. (2001), ³Real options: A practitionersguide´, Texere, New York, NY.

Dixit, A.V., Pindyck, R.S. (1994), ³Investment Under Uncertainty´,Princeton University Press, Princeton, NJ.

Lee, H.L., Wolfe, M. (2003), ³Supply Chain Security without Tear ,Supply Chain Management Review, Jan-Feb , pp 12-20.

Martha, J., Sunil, S. (2003), ³Targeting a Just-in-case supply chainfor the inevitable next disaster.´ Supply Chain Management Review,Sept-Oct, pp18-22.

Prater, E., Biehl, M., Smith, M.A., (2001), ³International SupplyChain agility- Tradeoffs between flexiblity and uncertainty.´International journal of operations and production management



Recommended Readings

Webpages

± ³Letters to the Editor: Toyota's Solution,´http://proquest.umi.com/pqdweb?did=23479148&Fmt=3&client Id=9338&RQT=309&VName=PQD, Asian Wall Street Journal. New York,N.Y.: Mar 14, 1997. pg. 10 .

± Pochard, S., ³Managing 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) ³Deciding When to Single-Source or Dual-Source aTechnology´, http://www2.cio.com/analyst/report1829.html , AnalystCorner.

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