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Disadvantage of relying on only one supplier

Anonymous A asked on Aug 12, 2018 - 2 answers

Hi guys, I did a profitability case of manufacturing yesterday and one of the questions was "what are the disadvantages of relying on only one supplier"?

Apart from the "supplier will have high bargain power", "supplier may not have enough capacity", another sample answer in the case book is that

"if the client wishes to add suppliers later, going from one supplier to two is much harder than than going from two to three".

Can someone please explain why as I don't have enough background knowledge of manufacturing. thanks.

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Benjamin replied on Aug 12, 2018
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Hi,
Bringing than one more supplier is indeed more than necesseray but can be challenging for the client :
- He will need to esablish clear specifications : depending on his business this is something he might not be able to do easily, especially if he worked for one same suppliers who know its business for years

- He needs to look for alternative and reliable suppliers : depending on the business could be not that common and in the end risky

The additonal reasons (on top of what you mentionned already) why it's important not to be too much exposed to one unique supplier :

- risk management : in case of supplier failure, breakdown, conflict. Make sure you have an alternative

- cost reduction : even though the relation is excellent, always good to create a comptetion to optimize your cost

Hope this helps

Benjamin

Anonymous replied on Aug 12, 2018

Hey,

I could think of risk diversification, basically if the only one supplier gets government tax increase, suffers politics instability, or the supplier itself suffers from supply/quality/financial etc. issue, the client will have a huge problem.

One another hand, for things that need R&D effort, it's beneficial to use single supplier which need be verified as reliable.

Hopefully this helps.

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