Multi-sourcing 'can increase risk of industry-wide disruptions'

Gurjit Degun
20 May 2014

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20 May 2014 | Gurjit Degun

Using multiple suppliers for the same parts to avoid risk can increase the threat of industry-wide disruptions, according to research from the Stanford Graduate School of Business.

Many firms generally have more than one supplier for critical parts so that they are not reliant on just one company in case there are any business interruptions within the supply chain.

The report explained that multi-sourcing is a “great way” to mitigate risk unless other companies are doing the same. “If that happens, and it does, the risks of industry-wide disruptions are actually higher than they would be otherwise,” said the report.

The study used the tsunami and earthquake in Japan in 2011 as an example. News reports said that the disaster damaged a company that supplies 40 per cent of the electronic chips used in cars.

However, the study argues that the problem is that a lot of companies have a “limited understanding of and control over the decisions of their suppliers”. It added that multi-sourcing can overlap supply chain networks for rival firms which means that the “likelihood of industry-wide disruptive events becomes increasingly higher”.

“Firms are becoming increasingly aware that they operate in a networked, global economy,” report co-author Kostas Bimpikis said. “This realisation unveils a host of important issues related to the interplay of the firms’ profit-maximising incentives and their positions in the supply chain structure. They are beginning to realise that it is not only important to know whom they are doing business with but also who else is doing business with them.”

He added: “Advances in information technology have made it easier for firms to delegate many of their core functions to third parties. Obviously, this has tremendous benefits, as companies can focus on what distinguishes them from their competition. But the flip side is that more delegation leads to longer and more decentralised supply chain networks, and there are all sorts of risks associated with that trend.”

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