Economists and supply-chain experts have competing views on whether companies should rely on a single supplier.
Hubert Pun of the Richard Ivey School of Business said using one source can leave a small business “dead in the water” and it should be avoided if possible.
Paul Ashworth, an economist with Capital Economics, argued that diversifying can sometimes be too expensive, and the risks of going with a sole supplier are so small, they outweigh the potential benefits of multiple sources.
If your company chooses to go with a single supplier, here are some tips on how to prepare for an unexpected interruption in production:
- Make sure you know in advance how to find an alternative supplier. Having the information can help you respond more quickly if there is an interruption.
- Make sure the alternative is manufactured as far as possible from the principal supply, preferably in another country, so that if one supplier is hit by problems such as a natural disaster or labour unrest you can switch to a supplier based in a location where those problems don’t exist.
- Keep extra stock on hand. Depending on your business and how perishable the product is, you may want enough to see you through several weeks to a month.
- Companies can protect themselves by asking for a clause in a purchase contract that imposes heavy penalties on the manufacturer if it has not diversified production and supplies are interrupted because its sole factory is shut down.
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