For most MSMEs, suppliers are not simply a means to an end; they are indispensable for ensuring that manufacturing, marketing, and service delivery functions operate seamlessly.
Supplier problems ranging from delays, shortages, increased prices, and difficulties in operations pose huge implications for any organization.
However, depending solely on one supplier may seem like a good idea, especially if there is a strong relationship with the supplier and competitive prices.
Nevertheless, it poses the danger of leaving one open to potential supply chain problems. It is at such instances that having multi-suppliers could prove vital. Creating multiple vendor relationships can help to minimize supply chain risks.
Supplier diversification strategy need not involve partnering with numerous vendors but with critical supplies and potential risks evaluated beforehand.
What Is a Multi-Supplier Strategy?
Multi-sourcing is a method where one company acquires the same or similar product or material or component or service from more than one supplier.
Rather than relying fully on Supplier A, for instance, an organization may apportion orders between Supplier A, Supplier B, and Supplier C.
The idea is not always to split orders in equal measure. An MSME could maintain Supplier A as the main supplier for the major part of orders while other suppliers as backups.
This offers organizations more leeway during changes in the market environment.
Why Supplier Dependency Can Be Risky for MSMEs
A business-to-business single-supplier situation can be advantageous in terms of quality assurance, ease of communication, and possibly better pricing. At the same time, there is the downside of having only one point of failure.
Should there be any problem on the supplier’s side in relation to:
- Material shortage
- Production troubles
- Delivery delays
- Labor disputes
- Financial instability
- Rapid increase in prices
- Quality control
Then the buying organization may not have much choice.
Whereas a big company might have other arrangements for sourcing, in case of an MSME operating with limited supplies and liquidity, it may become problematic.
This makes supplier risk management essential for MSME risk management.
How Multi-Supplier Strategies Reduce Business Risk
1. Reduced Dependence on a Single Supplier
The primary benefit of diversifying suppliers is decreased dependence.
An MSME that deals with more than one supplier has options in case any of them faces issues.
Orders can be diverted, raised or partially fulfilled by some other supplier.
For instance, a furniture manufacturer sourcing wood from two or three different suppliers is in a better position as compared to one that sources wood from only one supplier.
2. Ensure Business Continuity
Continued operations depend a lot on the availability of necessary materials and services.
In case of any issue faced by a supplier, it could set off a chain reaction.
Delayed receipt of raw material could slow down production; delayed production could delay delivery, ultimately leading to customer issues.
Having alternate suppliers could help in recovering quickly.
Even if the second supplier is not able to meet the full demand immediately, it might be able to provide at least the minimum necessary material.
3. Address Changing Prices
Supplier diversification could also help MSMEs address the issue of changing prices.
When an organization relies on a single supplier, its negotiation power will be limited. Comparison of quotes, payment methods, delivery times, and quality among various suppliers enables them to increase their negotiating power.
But it does not necessarily mean that the cheapest supplier should be chosen.
Instead, organizations should look at the value offered by each supplier, including quality, reliability, deliveries, payments, and services.
4. Better Manage Supplier Shortage
Market demand can fluctuate suddenly, while at the same time, suppliers will experience shortages.
If a certain supplier fails to meet the quantity needed, other suppliers can step in.
This will be particularly beneficial for MSMEs working in industries characterized by unpredictable market demand.
How MSMEs Can Build an Effective Supplier Diversification Strategy
Identifying Critical Supplies
Not all supplies need multiple sources for their procurement.
Identify:
- What supplies will hinder the production process?
- What materials require long periods of time before replacements are available?
- What supplies have few suppliers?
- What supplies change in price frequently?
This list requires immediate attention.
Evaluation of Potential Suppliers
Being able to procure supplies from another supplier is just not enough. The alternative has to be reliable.
MSMEs need to consider potential suppliers depending on the following criteria:
- Quality of the product
- Price
- Production capabilities
- Timely delivery
- Finances
- Geographical location
- Minimum order quantity
- Customer service
- Credit terms
An efficient supplier evaluation system will allow making decisions based on facts and not convenience.
Do Not Distribute Orders Equally among Multiple Suppliers
Having multiple suppliers is not about splitting orders equally among all suppliers.
Firms could adopt a primary and secondary system, where the main supplier is providing most of the orders, while one or two secondary suppliers get smaller orders.
It helps to keep backup suppliers well acquainted with the company requirements.
Test Backup Supplier Frequently
A supplier who has never delivered anything may not really be a backup at all.
MSMEs need to place small orders with their backup suppliers to test their true capability.
This is because they need to determine whether they can meet certain standards in terms of quality, delivery, packaging, and communication.
Use Technology to Improve Supplier Management
It may be hard for an organization to manage suppliers using manual processes as it expands.
Business and digital procurement platforms can enable SMEs to keep information on their suppliers, compare the alternatives, follow up on their orders and also monitor their performance.
It is possible to use the available information to recognize some recurring trends such as delays, increasing costs, or poor quality among others.
Balance Diversification With Supplier Relationships
The process of supplier diversification must not be done at the expense of maintaining healthy supplier relationships.
Suppliers who are dependable are very useful to any business. Small and medium-sized enterprises should build on trust, communicate their needs well, and maintain professionalism when dealing with the best suppliers.
The idea is not to replace suppliers but to avoid over-reliance on them.
Common Mistakes MSMEs Should Avoid
Though multi-suppliers can be helpful in reducing risks, there are situations whereby poorly implemented approaches end up creating other risks.
One such mistake that MSMEs could make is choosing suppliers purely based on price. This means that they opt for suppliers whose goods are priced low but which might not necessarily be quality.
Another mistake is bringing in too many suppliers without due diligence. It ends up making the process of procurement even more difficult.
It is also unwise to change suppliers quite often, especially where quality standards are necessary.
The best thing would be controlled diversification.
A Practical Multi-Supplier Strategy for MSMEs
An MSME can begin the procurement process with some steps:
Step 1: Identify essential products/services.
Step 2: Determine the risk of existing suppliers.
Step 3: Seek alternative suppliers and their evaluation.
Step 4: Test them by placing orders of smaller quantities.
Step 5: Determine purchase allocations.
Step 6: Conduct performance monitoring of suppliers regularly.
Step 7: Re-evaluate supply chain as and when there is a change in the market environment.
Such a procurement process need not be complicated for even smaller enterprises.
Why Multi-Supplier Strategies Create Long-Term Resilience
Not all business risks can be avoided.
There could be failures in the supplier’s end, disruption in transport, changes in prices, and shortage in the market that can occur at any time without warning.
The control that businesses have is on how they react to these problems.
With multiple suppliers, MSMEs have several ways to act on such problems.
With time, these actions become their competitive edge.
Building a More Resilient Supplier Network
Business risk reduction does not just mean having larger amounts of cash balances and getting more insurance coverage for MSMEs. Business risk reduction also means establishing a business operation system that is prepared for any unforeseen disruption.
Diversifying suppliers enables businesses to become less reliant, have business continuity, control procurement costs, and react faster to supply problems.
It is important to form a supplier network that is well-evaluated rather than expanding the list of vendors.
Using the strategy of recognizing crucial supplies, developing alternative supplies, monitoring supplier performance, and employing digital platforms for better procurement management, MSMEs will be able to achieve greater resilience within their supply chain.
Given the increasing unpredictability of the business world, having more than one dependable supplier is becoming an invaluable asset for many businesses.
For businesses looking to strengthen sourcing options, a reliable supplier network can provide additional flexibility when managing procurement requirements.
FAQs
Multiple suppliers can help MSMEs reduce dependence on a single supplier and provide alternatives when there are shortages, delays, price increases, or other supply disruptions.
Supplier diversification gives businesses alternative sourcing options, helping them maintain operations when one supplier cannot meet requirements.
Not necessarily. MSMEs should focus on critical supplies where supplier disruption could significantly affect production, delivery, or business continuity.
