How Do You Change Suppliers for a Key Product? Four Thoughts

Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?

Advice from the CEOs:

  • The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
  • The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
    • If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
    • In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
  • Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
    • If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
    • The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
  • Are you concerned that your current supplier might cut you off?
    • The CEO is not sure, but has identified this as a risk.
    • If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.

One thought on “How Do You Change Suppliers for a Key Product? Four Thoughts

  1. Prof Anjan Bhattacharjee

    All the advices are ignoring the basic Supply chain issues. Assuming components are going in the production line , any failure in quality or quantity [disruption in supply] will lead to stoppage of production line [Say Automobile]. The “Consequential loss of Production” is enormous. A brilliant solution we found
    in India way back in 70’s. We created a system of 3 suppliers developed for each component in the ratio of 40:30:30. Taking out a faltering supplier is overnight.
    Increasing orders 50:50 for other two. The competition between suppliers was intense on both price & quality. The Heavy vehicle manufacturer plagued by supplier failure and massive revenue/profit loss was contained. You may outsource only in part for a year or so to stabilize the quality/pricing/ reliability. Never “Switch” supplier for pricing overnight. You will be in a soup. Phasing out a source has to be gradual while stabilizing alternate sources. Our research showed three component suppliers in competition is Optimized solution for best Operations & Control.

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