Should You Diversify Your Supplier Base?

Diversifying your supplier base

It takes time to develop a successful relationship with suppliers. For many importers, once this relationship is stable, they are hesitant to keep looking for other factories to produce the same product. There are certainly benefits to working with as few suppliers as possible such as gaining economies of scale, stability in terms of quality assurance and predictability as far as shipping schedules.

However, with the recent inflation in China, partly due to decreases in VAT rebates, many factories are raising costs hand over fist. When a factory decides to raise your costs, you have 3 options:

1. Eat it - You need the product. You have no other options.
2. Try to Negotiate - Perhaps you can knock the price down a bit; however, you will still agree to a price increase and you have no real way of knowing whether the price increase is reasonable.
3. You’re Prepared with Alternative Factories - You’ve got secondary suppliers that could take up part of (or all of) future orders. You can play your suppliers off of each other, dangling carrots as necessary, and make sure that the price increases are reasonable.

Jason Busch at Spend Matters, adds an additional insight on why you should diversify your suppliers in his article Split of Business: The Best Sourcing Justification for Supplier Diversity?

By dangling the carrot of additional business out to the secondary suppliers, a buying organization can get them to invest more in the relationship than they otherwise would. Out of this might even come joint innovations or even new product ideas.

And at the end of the day, aren’t we all looking for better, more interesting products (at cheaper prices)?

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May 1, 2008 | Filed Under Negotiating & Strategy 

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