Managing Global Sourcing Risk

Daniel Dumke — Mon, 23 Jan 2012 17:34:15 +0000

Probably most companies source at least some parts for their products from global sources. This could be the steel from Australia, electronics from Taiwan or cloth from India. The reasons for international sourcing usually include cost and quality, which might be superior compared to local sources.

On the other hand longer shipment ways and less direct access and control may also increase the risks of quality failures, delays or even disruptions.

So at the moment a lot of companies struggle to find the right balance between increased risks and reduced cost in international sourcing. This study gives an inside view into fifteen companies and how they handle risks related to global sourcing, and therefore this overview is a good example for current practices in the field of supply chain risk mitigation.

Method

The authors still see a gap in the knowledge about how other companies analyze their sourcing related risks and how these risks are mitigated by them.

Therefore they use a multiple case study approach with 15 cases / companies within seven industries. In each company several information sources were tapped, including expert interviews.

Afterwards the authors compared the individual results in a cross case analysis.

Sourcing globally

But first the authors start with a literature analysis to analyze the reasons and risks of global sourcing.

Figure 1 shows their results regarding the advantages and risks of sourcing globally.

Figure 1: Sourcing Globally: Advantages and Risks (Christopher et al., 2011; click to zoom)

From this the authors extract a risk classification for global sourcing risks (figure 2).

Figure 2: Sourcing Globally: Risk Classification (Christopher et al., 2011; click to zoom)

Risks in global sourcing

Building on this literature review the authors conduct their case study. The cross-case analysis reveals risks in the following industries:

retail,

fashion retail and wholesale,

consumer electronics,

oil/gas,

mechanical and electrical equipment,

fast moving consumer goods (food and drink), and

aerospace.

The risks are shown in figure 3.

Figure 3: Risk Overview (Sourcing Globally) (Christopher et al., 2011; click to zoom)

Strategies for risk mitigation

The identified risks are handled very differently by each of the companies. Figure 4 shows the different approaches to identify and manage the risks.

Figure 4: Risk Management Strategies and Tools (Christopher et al., 2011; click to zoom)

Overall the authors find:

The study proposes four generic strategies for managing global sourcing risk: network re-engineering, collaboration, agility and a risk management culture. Evidence of each of these strategics was found in the case studies although no single company was applying all of them.

The study also shows that even though many managers were aware of the risks their companies were exposed to, risk management strategies were not implemented in a systematic and holistic manner.

Conclusion

It is not possible to generalize these results for any company, due to the specific exploratory nature of the method used. But I find the findings quite interesting and I think they could be used as a foundation to build your own mix of mitigation strategies.

Reference:

Christopher, M., Mena, C., Khan, O., & Yurt, O. (2011). Approaches to managing global sourcing risk Supply Chain Management: An International Journal, 16 (2), 67-81 DOI: 10.1108/13598541111115338

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Single or Dual Sourcing

Daniel Dumke — Mon, 04 Jul 2011 14:10:00 +0000

Today there is only one simple question: Single or dual sourcing, what strategy should be used when faced with disruption risks.

Definitions

There are four different approaches to sourcing sole, single, dual and multiple sourcing. Sole sourcing refers to a scenario where there is only one supplier in the supplier base, whereas single sourcing refers to the conscious decision to select one, single supplier out of a choice of suppliers. The dual sourcing model indicates that two suppliers are used (not necessarily at a comparable share). As the name says with multiple sourcing, multiple suppliers are selected, depending on the price or another criteria. The paper presented here focusses on single and dual sourcing only.

Model

The authors (Yu, Zeng and Zhao) make use of a mathematical model which contains a two echelon supply chain with two suppliers. One of the suppliers (main supplier) is located offshore (long lead times) and prone to disruptions, but on the other hand less expensive. The second supplier is located locally, but more expensive. Therefore there are three different sourcing alternatives: single sourcing of the main or the secondary supplier or alternatively dual sourcing with both suppliers.

Demand in the model is correlated with the price and stochastic.

Results

For each of the sourcing strategies the authors prepare and compare the profit equations. As a result the authors conclude that there are two critical disruption probabilities at the main supplier: p₁^c and p₂^c (p₁^c2^c) which build a frame for three different cases:

Case 1: the disruption probability of the main supplier is less than p₁^c then it is optimal to only source from the offshore main supplier.
Case 2: p₁^cdisruption 2^c, then it is optimal to source from both sources
Case 3: the disruption probability is larger than p₂^c, then it is optimal only to source from the reliable, local supplier.

Figure 1 shows the three cases.

Figure 1: Profit vs. Disruption Probabilities (Yu et al., 2009)

Conclusion

Of course the formulas in the model could be used to calculate the above mentioned probabilities and then compare them to the current disruption probability to decide on the optimal strategy. But this would probably lead to wrong results, since the model contains many assumptions that are probably not met in your case study. But the intension of the model is clear: To highlight that depending on the probability of a disruption it, not only can be optimal to have dual sourcing but also to completely switch to a more reliable supplier to optimize profits.

Reference:

Yu, H., Zeng, A., & Zhao, L. (2009). Single or dual sourcing: decision-making in the presence of supply chain disruption risks Omega, 37 (4), 788-800 DOI: 10.1016/j.omega.2008.05.006

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