Does Having Multiple Suppliers Cost More?

Suppliers offer lower Price Per Unit (PPU) for the increments or multiples of the Minimum Order Quantity (MOQ). They provide a price advantage for high volume orders due to the cost efficiency of manufacturing large quantity batches at once. However, switching between smaller quantities of product variations increases manufacturing costs. For instance, running a bottling line for original Pepsi before diet Pepsi requires equipment cleaning and adjustments to prevent syrup mixing. Each transition incurs labor and equipment clean-down costs. Splitting sourcing amplifies these transitions while reducing volumes per order, leading to an increase in multiple suppliers cost. This ultimately will be passed to your business as part of the increased cost of goods sold (COGS).

Develop your strategy for optimum multiple suppliers costs in supply chain

Splitting the order quantity for your business between two or more suppliers, while potentially mitigating a portion of outage risk, could lead to increased costs eroding margin/profitability. In periods of peak demand this could have a significant financial impact on your business. This impact is also relevant to the value of your orders along with the quantity.

Suppliers tend to prioritize fulfilling orders that are high in value and quantity prior to the smaller ones. If these suppliers are also in distant locations, your lead-time will potentially be inflated. For that reason, splitting your supply to multiple sources might cause delayed supply. The stockouts due to late supply are risky for your competitiveness and the cost is often extremely hard to predict. In other words, your competitors might succeed getting their products in the market while you’re waiting for your order to be fulfilled.

Introducing new suppliers to your procurement function complicates supplier management, increasing costs. Managing quality, effective communication, and performance metrics monitoring for more suppliers translate into higher costs. A strategic approach involves diversifying the supplier base for non-significant revenue products, allowing your business to assess compatibility with other suppliers while minimizing revenue risks associated with multiple suppliers cost.

Can your business be more resilient with a diverse supplier base?