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AN INVESTMENT PERSPECTIVE ON GLOBAL VALUE CHAINS
sourcing often promotes innovation and competition among suppliers, giving MNCs access to better prices and higher quality. Multiple sourcing also helps MNCs maintain their supply chains’ agility and thus reduces their risks. However, supplier diversification could result in high costs because identifying potential suppliers and building stable relationships requires significant investment and effort. Diversification is also not always an option: capable suppliers that can deliver products or services with the required quality, timeliness, and volume can be rare in highly specialized segments. Complex products often require special machinery and customized components, requiring relationship-specific investments in suppliers and stable, long-term contracts. Additionally, although single sourcing may seem more risky than multiple sourcing, it requires much less work to initiate and maintain, particularly when it comes to qualifying suppliers. Single sourcing also maximizes an MNC’s volume leverage over its chosen supplier’s prices and allows it to maintain a stronger relationship with the supplier, which can result in better terms and more stability in the long term (table 2.2). Increasing supply chain visibility is another frequently cited strategy for MNCs to map and manage risks. MNCs with very complex global supply chains have realized the importance of end-to-end visibility as they face more frequent supply chain disruptions. They work to increase transparency throughout their multitier supply chains, constructing databases with information on the location, performance, audit results, and risk factors of both direct and indirect suppliers. MNCs also work closely with key suppliers to monitor the most relevant risks, define possible scenarios and assess their impacts, and develop response strategies. As with supplier diversification, gaining end-to-end supply chain visibility is easier said than done. The weak links in a supply chain often purposefully conceal their weaknesses; uncovering them can be quite challenging. Studies show that business risks increase with the tier of a supplier: second-tier suppliers often have many
TABLE 2.2 Pros and cons of single- versus multiple-sourcing strategies Sourcing strategy
Pros
Cons
Single sourcing
• Less work to qualify the source and less • Potential loss of market-competitive pricing administrative effort involved, which can be a • Difficult to find alternative suppliers during significant advantage when dealing with highly supply shortages technical materials • High risk of product unavailability, with possible catastrophic loss of customer goodwill, should • Maximizes leverage based on total quantity; firms the supplier's operations be interrupted more likely to negotiate a volume-based price • Stronger relationships that may offer better terms in the long term
Multiple sourcing
• Diversified suppliers act as safety net to ensure products’ availability • Could promote innovation and competition among suppliers, leaving the MNC more likely to get better prices and quality • Supply chain agility maintained by developing a database of qualified suppliers, enabling opportunities in a variety of scenarios
• More costly to build and maintain relationships with multiple suppliers; high administrative costs • Loss of the volume leverage that can help MNCs obtain attractive pricing
Source: Blome, Constantin, and Michael Henke 2009. Burke, Carillo and Vakharia 2007. Note: MNC = multinational corporation.
