Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Cut Costs with Dual Sourcing
Transcript
- Lucas: So the supplier came back with a 12 percent price increase, effective in 90 days. No negotiation, just a take it or leave it email. And the procurement lead at this mid-sized manufacturer told me later that her first thought was, we can't do anything about this. They're our only source for this component. Luna: That's the worst position to be in. When a supplier knows you have no alternative, they hold all the cards. Lucas: Exactly. And most buyers in that spot try to negotiate the increase down, maybe get it to 8 percent, and call it a win. But this team didn't. They went the other direction. They started a dual sourcing strategy. Luna: So they brought in a second supplier. But that's not exactly a quick fix. How long did that take? Lucas: About seven months from kickoff to first production parts. And the result was a 9 percent cost reduction versus the original price, not just versus the increase. But the real story here is how they pulled it off, because dual sourcing has a lot of moving parts. Luna: Where did they even start? I imagine you can't just call up a new supplier and say, hey, we need you to make our part. Lucas: Right, there's a qualification process. This manufacturer was making a precision metal component, tolerances in the thousandths of an inch. So they put together a team of procurement, quality, and engineering, and they spent the first two months just evaluating potential suppliers. Luna: How many did they look at? Lucas: They started with a list of eight, all pre-screened for basic capabilities. Then they narrowed it to three who got a detailed RFQ, and two of those made it to on-site audits. The audit included a process capability study, and they even ran a trial batch of parts before committing. Luna: So that's pretty thorough. But I'm guessing the big question was, how much volume do you give the new supplier? You don't want to just hand them everything. Lucas: That's exactly where a lot of dual sourcing efforts fall apart. If you give the new supplier no real volume, they have no incentive to invest in your business, and you end up with a token second source that doesn't save you anything. If you give them too much too fast, you risk quality issues or disruption. Luna: So what did they do? A 50-50 split? Lucas: No, they were smarter than that. They started the new supplier at 30 percent of volume, and the incumbent kept 70. But here's the key: they put a formal review every quarter where they reassessed the split based on performance, including price, quality, and delivery. So the incumbent knew that if they slipped, the volume would shift. Luna: That's a nice incentive. But didn't the incumbent push back? I mean, they just gave you a big price increase, and now you're telling them they might lose more volume. Lucas: They weren't happy, but they also didn't have a contract that guaranteed them the business. And that's actually the deeper lesson here. This manufacturer had been single sourcing for over a decade, and the supplier had gotten comfortable. They knew there was no real competition. Luna: So dual sourcing was as much about signaling as it was about the actual second supplier. Lucas: Exactly. And the signal worked. By the time the new supplier was approved and ready, the incumbent came back with a revised offer that undercut the original increase. But the manufacturer didn't just take it and drop the dual sourcing plan. They kept both suppliers, and eventually the split settled at 60-40. Luna: So they ended up with two suppliers and a 9 percent saving. But there's got to be some added complexity. Managing two suppliers is not free. Lucas: No, it's not. And this is where a lot of buyers get burned. They see the lower unit price, but they ignore the extra work: dual qualification, two sets of audits, more complex logistics, potential quality variation between the two. The total cost of ownership can go up if you don't manage it. Luna: But this team apparently made it work. What did they do to keep the complexity under control? Lucas: A few things. First, they standardised the component specifications as much as possible, so both suppliers were producing to the same drawing with the same critical tolerances. Second, they set clear performance metrics for both, and they reviewed them quarterly as I said. Third, they made sure the two suppliers didn't share a common sub-tier supplier, because that would have defeated the whole purpose. Luna: Ah, that's a subtle point. If both suppliers buy their raw material from the same mill, and that mill has a fire, you're still down. Lucas: Right. And that's the risk management angle. Dual sourcing is often pitched as a way to reduce cost, but the resilience benefit is huge. In this case, the second supplier was in a different region, so they also got some geographic diversification. Luna: So what was the actual saving? You said 9 percent versus the original price. How much did that translate to in dollars? Lucas: The category spend was around $3 million a year, so the 9 percent saving was about $270,000 annually. Not a huge number for a Fortune 500, but for a mid-sized manufacturer, that's meaningful. And they avoided the 12 percent increase, so the real impact was more like 21 percent versus what they would have paid if they'd just accepted it. Luna: That's a solid outcome. But I'm curious, what were the upfront costs? Audits, trial runs, engineering time, that can't be cheap. Lucas: They estimated the total project cost, including all the internal time, at about $40,000. So the payback period was just over two months. That's a pretty compelling return. Luna: Yeah, that's a no-brainer. So what advice would you give to a buyer who's listening and thinking, okay, I want to try this, but my category is different, or my supplier is really entrenched? Lucas: First, don't start with a price increase crisis. The best time to develop a second source is when you don't need it. That way you have leverage in every conversation. Second, be realistic about which categories make sense. Dual sourcing works best when the component is standardisable and there are capable suppliers in the market. If you're buying something highly customised to one supplier's process, the switching costs can be prohibitive. Luna: So what's the actual data on dual sourcing? I've seen studies that say it can reduce costs by 5 to 15 percent, but also that it can increase complexity without savings if not done right. Lucas: There's a paper from a few years back in the Journal of Supply Chain Management that looked at a bunch of manufacturing firms and found that dual sourcing, on average, reduced total cost by about 7 percent compared to single sourcing, but only when the two suppliers were in different countries. When they were in the same country, the savings were negligible. The reason is that a local second supplier often shares the same cost structure, so you don't get the competitive tension. Luna: So geography matters as much as the number of suppliers. That's a good insight. Lucas: It does. And it's something this manufacturer did right. The new supplier was in a different country with lower labour costs, but they also had to factor in longer lead times and potential customs issues. They offset that by keeping the incumbent as the primary source for the first year, so they didn't compromise delivery performance. Luna: You know, this whole conversation reminds me of something I read about how some companies use dual sourcing as a negotiation tactic even if they never intend to fully switch. They just want to keep the incumbent honest. Lucas: That's a real strategy, but it can backfire if the supplier calls your bluff. The manufacturer in this case was actually serious about moving volume, and the supplier knew it. That's why the negotiation worked. Luna: So the credibility of the threat is everything. If you're not really prepared to switch, don't wave the threat around. Lucas: Exactly. And that's the core of the dual sourcing mindset. It's not about having a second supplier for the sake of it. It's about having real options, so you're never trapped in a take it or leave it situation again. Luna: And if this episode has given you an idea for your own procurement strategy, and it feels like it was worth a coffee, you can support the show at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep these conversations ad-free. But back to dual sourcing. The other thing that often gets overlooked is how you exit a dual sourcing arrangement if it isn't working. This team actually built in a clause that let them walk away from either supplier with 90 days notice, which gave them even more flexibility. Luna: That sounds smart. So you're never locked in, even with a second source. Lucas: Right. And that flexibility is what ultimately gives you the upper hand. The takeaway here is that dual sourcing isn't just a cost-cutting tool. It's a way to change the power dynamic in your supplier relationships. And in this case, it turned a 12 percent price increase into a 9 percent cost reduction. Luna: A 21 percent swing. That's the kind of result that gets noticed at the executive level. Lucas: It does. And the best part is, this isn't a complicated strategy that only works for giant corporations. This was a mid-sized manufacturer with a specific problem. They just took a systematic approach and had the discipline to see it through. Luna: So what's the first step for someone who's listening and thinks, I want to try this? Should they start building a list of potential suppliers today? Lucas: The first step is actually an internal one. Map your category spend and identify which components are single sourced and where the switching costs are manageable. Then do a quick market scan to see if there are viable alternatives. If there are, you've already started building your leverage. And if there aren't, you know you need to work on making your specs more standardisable. Luna: Great advice. Thanks for breaking this down, Lucas. This gives listeners a lot to think about. Lucas: Thanks, Luna. And if you have a dual sourcing story of your own, we'd love to hear about it. Until next time.