With the COVID-19 pandemic disrupting the complex system of global supply chains, an expert from Binghamton University says the risk from these kinds of crises can be minimized in the future.
Donald Sheldon, lecturer of supply chain management in Binghamton University’s School of Management, says that companies should consider moving towards dual-sourced supply chains – meaning they buy the same product from two separate sources.
“Dual sourcing has many benefits, but most importantly it gives you an insurance policy against these kinds of ‘black swan’ events,” says Sheldon.
If one of your suppliers is disrupted by an emergency or crisis, the other supplier would help you ensure continuation of your business, says Sheldon. This is especially important as customers expect shorter lead times with the emergence of services like Amazon Prime.
“The most important operational performance objectives remain customer service first and lowering costs second,” says Sheldon.
While single-source supply chains have its advantages, Sheldon suggests that companies should consider a dual-sourced 80/20 approach, even if it increases the cost.
“The highest-rated supplier, in terms of quality, delivery, lead time, flexibility and cost, would generally receive about 80% of your demand requirements, while the secondary supplier would receive the remaining 20% of your orders,” he says. “It’s understood that the secondary supplier may not offer the favorable pricing the higher-rated supplier does, but you greatly diminish your risk for these kinds of events.”
Sheldon points to the 2011 tsunami that impacted Japan as a ‘black swan’ event that highlighted the need for dual-sourcing, as companies that relied on Japanese suppliers found themselves struggling to find new sources.
“Working with companies all over the world during that time, I observed firsthand that single-sourcing was probably a bad idea, especially with strategically important components and products,” he says.
“We are experiencing what is possibly the worst economic disaster in our lifetimes with the COVID-19 pandemic. The same discussion about sourcing is emerging again,” he says. “It seems that while we were forgetting the last major supply chain disruption from 2011, the next one was in the lobby waiting to come in this year.”
As businesses work their way through this difficult time, Sheldon says this event offers an opportunity to rethink operations for long-term success.
“This is a time for strategic thinking. Conjecture should go beyond the near future and establish practices that get us closer to the real operational performance goals of meeting customer demands while lowering costs. The next reactive step of strategic procurement should be dual sourcing your supply chain.”
Donald Sheldon is a lecturer of supply chain management at Binghamton University School of Management. Sheldon has 40 years of supply chain experience and has served in top management roles at Fortune 500 companies. He is currently the principal of DHSheldon & Associates LLC.
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