Additional Supplier Selection Decisions

Additional Supplier Selection Decisions

 

Now that we have the information to identify potential suppliers, we must discern the best strategy in procuring products and service from potential suppliers.

 

  • Single versus Multiple Sourcing – while there are many pros and cons to either have one main supplier or multiple suppliers, one must understand the risks with both.  Genuine concern exists among supply executives about how much business should be placed with one supplier, particularly if the supplier is small and the buyer’s business represents a significant portion of the seller’s revenue.  With multiple sourcing, concerns exist about whether or not buyer can leverage their market power adequately to get the best pricing possible.  If a decision is made to divide an order among several suppliers, there is then the question of the basis on which the division is to be made.  The actual practice varies widely. Some believe it is best to divide the business equally, or to use geographic coverage, or give the most business to the most favored supplier and give the rest to one or more alternates.
  • Manufacturer versus Distributor – If wholesalers are carrying the products of various manufacturers and spreading marketing costs over a variety of items, then they may be able to deliver the product or service at a lower cost than going direct to the manufacturer.  Also local sentiment may be strongly in favor of using a local distributor.  Large organizations will seek to bypass the wholesaler for cost savings for larger shipments, which shows why each participant in the value chain must add value.
  • Geographical Location of Sources – should supply personnel use geographically disperced sources or local suppliers?  Much of this depends on the unique nature of the product and on cost-tradeoffs in the supply chain.  The unique nature of a product must give one a competitive advantage a substitute product cannot duplicate; the cost-trade offs in transportation, acquisition cost, inventory carrying cost, and ordering cost must result is the lowest landed cost, no matter if the product is close or distant.  Lastly the manufacturing/service processes of a firm (Make to Stock, Make to Order, Assemble to Order, Engineered to Order) along with lowest landed cost will also if the geographic location of a supplier makes a difference.
  • Supplier Size – The size and nature of the requirement may also affect the decision, because it is general wisdom that the larger the requirement, the larger the suppier should be.  Generally, smaller suppliers tend to be local those smaller requirements where flexibility, speed of response, and availability tend to be more important than price.  Larger suppliers tend to be more appropriate for high-volume requirements where technology, quality, and total cost of ownership may be critical; medium suppliers are in between.  There are always exceptions to the rules, which includes suppliers.