Risk Mitigation with a Dual-Source Supply Base Data Modeling
Many new trends in sourcing include the new term Sure-Shoring. This means a supply chain may have multiple sources close to home and across the world. With all supply chains, there is potential for geo-political instability, natural disasters, or even a giant container ship blocking the Suez Canal to affect the day to day.
All that said, planning for multiple types of supply introduces more variation into the supply and demand planning model. A question you may have is, “How do I carry the right amount of safety stock when one supplier can deliver in 10 days and the other in 40 days?”.
At RSI we can model a binomial supply situation. Meaning if you know how often you use the shorter lead time supplier, and how often you use the longer lead time supplier, we simulate it. Oftentimes, when planning for dual source supply bases, the inventory levels are reflective of one of the suppliers and not both.
Extra Risk and Opportunity
When we don’t account for multiple suppliers, we come across two distinct possibilities;. we have extra risk if the second source of supply has a later/longer delivery time or we have opportunity if they have a quicker lead time from one supplier (and wouldn’t need as much inventory)
Using a Second Source as Risk Mitigation
One of the common ways to model a second source as risk mitigation is to aim for a 95% service level and then model the second source as an expedited source that is used 5% of the time and where it may be more expensive or use a faster (more expensive) method of transportation.
What if a disruption in my supply chain causes me to use one of my suppliers entirely?
RSI uses what-if modeling to simulate what would happen with your inventory if in fact there was a supply disruption. You can change the input parameters, and then simulate the model. You can run as many simulations as you would like. The input parameters can model an entire supply chain and function as more than an equation.
What does this look like in practice?
Right Sized Inventory’s results allow you to have the data that demonstrates what a second source of supply can do to reduce inventory and increase service level. Alternatively, if we simulate the binomial supply base 2000 times and there is not a significant reduction in inventory, then the questions become, “Do we need the second source of supply?” and “Are there factors outside of inventory planning that need to be considered in terms of securing our supply base?”. Instead of additional questions, the result might be able to help answer the question,”Is the incremental revenue worth the extra cost in supplier expedites OR additional inventory?”
What are you doing to secure your supply chain today? Have your lead times reduced to pre-pandemic levels?