Click here for the printer-friendly version. If so, does the lower risk justify the premium? For simplicity, I used price as the only decision criterion above. Key advantages of Multiple Sourcing when compared to Single Sourcing include: Van Mieghem said they were surprised to find that plugging real numbers into the formula resulted in a rough validation of the consultants’ advice for allocating about three-quarters of the demand to the slower source. Email This Article To A Friend Using the TBS policy, base inventory needs would be sourced from China while the plant in Mexico would be reserved for satisfying surges in demand, such as might occur after a Tour de France victory by a cyclist using one of the company’s bicycles. What they found was a gap between theory and practice. Reshoring is most effective when the company utilizes “dual sourcing” by partnering with both off-shore and US-based suppliers. Those assumptions may be right sometimes but, as a professional, you should make decisions on facts, not assumptions. Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Dual sourcing is cost neutral and provides a type of risk mitigation plan for your company. A risk/benefit analysis of sourcing strategies: Single vs Van Mieghem said this basic question of how to split demand is one many seasoned executives approach intuitively: they know that China is less expensive and that often more of the demand can be allocated there, but exactly how much to allocate is a question that must balance cost with service, and is so complex that it can cause decision makers to exhaust both their calculators and their patience. That’s where dual sourcing has an advantage over single sourcing. However, as China’s cost advantage decreased or levels of demand became more volatile and unpredictable, the relative value of dual sourcing would become negative and the company would be better off placing orders only with the plant in Mexico. How do you split the demand between the two plants and place a hard number on the orders? He said, “I am very pleased on a personal level with this paper because it is the first time in my work when theory and practice have gone so beautifully hand in hand.”, Member of the Department of Managerial Economics & Decision Sciences from 2005-2016, Harold L. Stuart Professor of Managerial Economics; Professor of Operations. Scalability can be an issue with single sourcing, and there’s often a lack of flexibility when it comes to costs. | Copyright 2007. Make complex supplier decisions on a total cost of ownership basis, considering quality, delivery, service, and other variables. Van Mieghem cautioned that the model has limitations: it accounts for a single product from just two global sources, assumes a single decision maker and a single market, and assumes that the cost parameters do not change over time. A good first step in minimizing total landed cost is to adopt a sourcing policy the authors term “tailored base-surge” (TBS), which splits demand allocation into base and surge demands. As a member, you also get access to: If you haven't been taking advantage of these benefits, why not log in and start now? Members of the NLPA get more than just articles like this by email. In last weeks blog we defined the different forms of Outsourcing. This point is represented in Figure 2, where the “inventory cost” curve begins a steep vertical climb, pulling the “total cost” curve along with it as sourcing from China increases beyond roughly 75 percent. We provide quality CNC metal parts that are up to specifications and delivered on schedule. Figure 3 shows that the bicycle distribution company would be better off using both China and Mexico when the relative value of dual sourcing was positive. In the consultants’ case, Mexico was the nearby but expensive source and China distant but cheaper. “I looked at their graph and thought, ‘These are such beautiful curves that cry out for mathematical analysis, exactly what we do in our research,’” Van Mieghem recalled. Let’s discuss the top benefits of adding a US source to your off-shore sourcing. “It is a simplification of reality, but in the end it still captures the main tensions in the original decision problem.” This model would be most useful for companies that had a reasonable handle on their cost structures and demand forecasts, he added, noting that the consultants who spoke in his class were already supplying it to their clients for real-world applications. We’ll also provide some insights into why US manufacturers should consider sourcing parts from American machine shops like ours. Global sourcing is very important in practice, but leads to quite complex analytical problems—and there is no quantitative theory that I’m aware of that can guide the strategic allocation of uncertain demand to two global suppliers.”, Bridging Theory and Practice in Global Dual Sourcing Dilemmas.
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