One of the key questions to ask when creating a supply chain strategy is whether to buy from one or more sources. There are pros and cons to both approaches.
What is a supplier?
A supplier is a business that provides a product or service to another entity. The role of a supplier is to provide high-quality products from a manufacturer at a good price to a distributor, retailer, or in some cases, directly to the builder. Suppliers play a critical role in the product life-cycle, from sourcing raw materials to increasing production rates. A successful supplier will search for better options when it comes to raw materials as the market changes.
To find the right suppliers, businesses need to consider a number of critical factors, including:
- value for money
Suppliers play a central role in the success of your construction business and your ability to grow profits. It is therefore important to manage your suppliers carefully, and to maximize the value of these relationships.
What is Supplier Relationship Management?
Supplier Relationship Management is the very deliberate process of planning and controlling all relationships with vendors that supply any products or services to your business.
This can involve raw materials, manufactured products, service contractors, heavy equipment suppliers, cleaning services, and even something as basic as office supplies. Creating and maintaining a Supplier Management Process that clearly outlines the plans and processes it takes to oversee all of your suppliers is important so that your company can reliably partner with the best companies or individuals that suit the business needs.
The Supplier Management Process goes further than just choosing the right vendor, it outlines the process of building trust with suppliers and improving on the services provided by them.
Managing relationships is a huge part of any department but it is more so for suppliers as they are not under the internal control of your company. Since suppliers exist outside of your business, you will need to be careful with the information shared with them. It is vital to strike a balance as the supplier needs to feel like your business values them before they will provide excellent service seamlessly.
Having a single supplier for each item your company needs to do business makes sourcing simple. Having multiple suppliers for each item can add complication, it also provides protection against the risk of interruption. Balancing these two concerns is a key task in crafting an optimal supply chain strategy.
Single supplier strategy means you are making a commitment to purchasing a given resource from just one supplier. If the supplier is well-matched and reliable, this can offer some benefits to businesses.
- forging a relationship is easier with one supplier than with multiple ones
- partnership approach may help build trust and shared benefits
- costs may fall due to economy of scale if you order from just one supplier
- integration of systems may be easier with a single supplier
Many times a shared culture and proximity can also play a key role in a successful partnership. Effective purchasing should focus on what your business needs and what you want to achieve. It's always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it.
Relying on single sourcing as a supply chain strategy exposes a company to the possibility of not being able to get critical supplies in the event of a disaster, like a major storm or a fire, that disrupts a supplier's operations.
Common drawbacks of this strategy include:
- increased vulnerability of supply
- increased risk of supply interruption
- greater dependency between your business and the supplier
Natural disasters are just one of the hazards that may cause a business owner to regret single-sourcing a vital component. Even worse, what if you discover your source uses unethical practices, such as slave or child labor? You would have to stop using that source immediately. If you are sourcing from a single supplier, and they go out of business or become unable to meet the demand, you will almost certainly put your business in jeopardy!
How many suppliers do you need?
It's well worth examining how many suppliers you really need. Buying from a carefully targeted group could have a number of benefits:
- it will be easier to control your suppliers
- your business will become more important to them
- you may be able to make deals that give you an extra competitive advantage
It's important to have a choice of supply sources and carefully weigh up the advantages and disadvantages of single or multiple supplier strategy.
Negotiate with your suppliers.
Negotiation commonly focuses on costs, but this doesn't necessarily mean that you must pursue the cheapest possible price. You may want to negotiate other factors such as delivery times, payment terms or the quality of the goods. It's a good idea to agree to service levels before you start trading so all parties understand the expectations. The priorities should be clear as to how performance is measured. A written contract can help you avoid uncertainty and minimize the risk of disputes.
Maximize the value of your supplier relationship.
A good relationship with open communication between yourself and your suppliers is vital. Consistent contact and follow-up is important as it allows you to potentially identify and deal with any problems before they escalate and find opportunities to work together more effectively.
Multiple sources are necessary when one supplier does not have the capacity to furnish the total requirements of the buying organization. A multiple sourcing strategy can benefit businesses who prefer to spread demand across a number of suppliers that, collectively, have more capacity and are more responsive to the buyer. It is also necessary when one supplier is unable to meet your business needs, for example, where a product has multiple components that no single supplier can produce.
Multiple sourcing may help buyers get more for their money by creating competition and an incentive for each supplier to improve cost and service. Many organizations award a higher percentage of the business to the supplier with the lowest cost or best performance.
There are downsides of having multiple suppliers.
Working with more than one supplier adds complexity to the supply chain and can come with a potential price tag. While multiple-vendor sourcing may reduce dependency, increase flexibility, and reduce capacity risks, it can lead to more complicated supplier relationships. It can also result in lower efficiency, less control over quality and, ultimately, higher costs as the number of suppliers grows.
You must weigh these potential negatives against the risk of supply interruption and other downsides that may go with having a single supplier.
One of the biggest disadvantages of dual sourcing is the possibility of inconsistent quality between your two suppliers. If one of your suppliers provides superior quality, but your other supplier’s quality isn’t quite as good, that may cause you problems. While it seems like your business would always realize a lower cost for your supplies when pitting two vendors against each other, that isn’t always the case.
Many of the risks of having multiple suppliers can be mitigated by making sure you're working with high-quality suppliers.
- Use supplier scorecards. These help you objectively evaluate key supplier criteria such as product quality, delivery, returns, defects and customer complaints. The supplier scorecard ties the company's short, and long-term, goals to the supplier's performance.
- Create a formal supplier certification process to identify the relationships most likely to reduce risk and ensure supply continuity. The assessment and certification can be done by a small cross-functional team that evaluates a supplier's strategic fit and capabilities against criteria for performance, reliability, and other factors. .
A strong relationship with strategic suppliers will benefit both sides. Look for opportunities to deepen the relationship with key strategic suppliers. It is important to periodically explain the direction of your business and any new plans and goals you intend to pursue. A partner-supplier may be able to give you advice on new technologies and materials that you could use to improve your products and achieve your goals.
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