A risk/benefit analysis of sourcing strategies: Single vs. multiple sourcing

Abstract

As more companies recognize the importance of quality to their long-term survival they are, among other actions, attempting to formulate sourcing strategies that are consistent with their quality strategies and policies. The two major sourcing strategy options available are multiple and single sourcing. Unfortunately, the literature has lagged behind the practitioner's needs for direction in this area and, therefore, provides little help to managers wrestling with this important and difficult issue. This study uses a risk/benefit approach to carefully examine sourcing strategies from the perspective of the purchaser, or vendee. To ensure a complete and accurate identification and description of the various factors which influence sourcing decisions, intensive interviews were conducted with purchasing and quality personnel at the Manager and Director levels within a number of large, international organizations. Most of the interview data was collected at Control Data, General Mills, Honeywell, Pillsbury, and Unisys. This data was supplemented with information from managers at other companies and the literature which exists in this area. The paper begins by describing the various definitions of single sourcing and the definition which is used for the purposes of this paper. Next, the factors which should influence managers' sourcing decisions are identified and classified into five risk/benefit categories. These categories are then incorporated into a conceptual risk/benefit assessment model for managers to use in the evaluation of their sourcing strategy. The conceptual model is an adaptation of the additive rating model used for facility location decisions [1]. It is suggested that the model would most appropriately be applied at the family of parts level. Application at this level would likely result in different sourcing strategies for different part families (and different organizations), depending on the characteristics of each family. This is consistent with the conclusions of Hahn, Kim and Kim [10]. This work contributes to the literature in several ways. The first of these contributions is the complete definition of the various levels of single sourcing. Compilation of the many factors associated with both single and multiple sourcing decisions is another contribution. Prior to this research, the identification of these factors had been incomplete, limited to single sourcing, fragmented across a number of articles, and disseminated largely by word of mouth. The construction of a framework within which these factors can be categorized is also new to the literature. The final contribution of this research is the development of a conceptual model to analyze the combined effects of these factors.