Choosing suppliers is one of the most important decisions made by a company. The efficiency and value a supplier provides to an organization is reflected in the end product the organization produces. The supplier must not only provide goods and services that are consistent with the company’s mission, it must also provide good value. The three most important factors in choosing a supplier are price, quality, and on-time delivery.
A company must not only choose who it wants as a supplier, it must also decide how many suppliers to use for a given good or service. There are advantages to using multiple suppliers and there are advantages to using one supplier. Whether to single-source or multiple-source often depends on the supply chain structure of the company and the character of the goods or services it produces.
If a company uses a single supplier, it can form a partnership with that supplier. A partnership is a long-term relationship between a supplier and a company that involves trust, information sharing, and financial benefits for both parties. When both parties benefit from a partnership, it is called a “win-win situation”. It is easy to see how choosing suppliers is one of the most important decisions a company makes.
There are advantages and disadvantages to using one supplier. One advantage is that the supplier might own patents or processes and be the only source for the product. With one supplier, pricing discounts may be granted because purchases over the long-term are large and unit production costs for the supplier are lower. The supplier may be more responsive if you are the only purchaser of an item, resulting in better supplier relations. Just-in-time ordering is easier to implement, and deliveries may be scheduled more easily. Finally, using a single supplier is necessary to form a partnership. One disadvantage is that if that one supplier experiences a disaster at its warehouse like a fire or a tornado, or its workers go on strike, there is no other ready source for the product. Another possible disadvantage is that a single supplier may not be able to supply a very large quantity if it is suddenly needed. Also, sometimes the government requires the use of multiple suppliers for government projects.
There are also advantages and disadvantages to using multiple suppliers. Suppliers might provide better products and services over time if they know they are competing with other suppliers. Also, if a disaster happens at one supplier’s warehouse, other suppliers can make up the loss. If a company uses multiple suppliers, there is more flexibility of volume to match demand fluctuations. One disadvantage with multiple suppliers is that it is more difficult to forge long-term partnerships. Information sharing becomes riskier, lower volumes for each supplier provide fewer opportunities for cost savings, and suppliers tend to be less responsive to emergency situations.
Partnerships are long-term relationships between a supplier and a company that involve trust and sharing and result in benefits for both parties. A good example of a partnership is the partnering between a Deere & Co. farm equipment factory and its suppliers. Deere decided to outsource its sheet metal, bar stock, and castings part families.
When Deere sent requests for bids to 120 companies, 24 companies responded to say they were interested. Deere then sent a team of engineers, quality specialists, and supply chain managers to evaluate each company. One supplier was chosen for each of the three part families. All three of the suppliers that were chosen were located less than two hours of driving time from the Deere plant.
For many years, all three suppliers have continued to provide outstanding quality, delivery, and cost performance to Deere. The suppliers benefited by gaining a long-term customer with a large amount of profitable business. Deere realized a 50 per cent drop in production costs on the three part families and was able to better focus on its mission of manufacturing farm equipment.