Dual Sourcing
Marriott School of Management
By Chad Jensen
Overview
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What is Dual Sourcing (DS)?
Types of sourcing
How it works
Advantages of DS
Disadvantages of DS
Overview
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When to use DS
Evaluation Criteria for DS
Real life examples
Dual sourcing exercises
Summary
Recommended readings
Dual Sourcing
Definition
Using two sources (suppliers)
when purchasing a product
or service.
Illustration
Dual sourcing
Suppliers
Factory
Types of sourcing
• Single
• Dual
• Multiple
Illustration
Single sourcing
Supplier
Factory
Illustration
multiple sourcing
Suppliers
Factory
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 Evaluation
Dual 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 Evaluation
Dual 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_ThesisSophie.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.