Global sourcing, single sourcing, multiple sourcing, modular sourcing: advantages and disadvantages

• Single sourcing means one supplier per procurement item, multiple sourcing means several. Dual sourcing sits in between with exactly two suppliers.
• Global sourcing is more than buying abroad: it is the deliberate, strategic expansion of international procurement.
• Modular sourcing procures ready-to-install assemblies instead of individual parts, reducing the effort in procurement and assembly.
• There is no perfect solution: the sourcing strategy depends on the product in question.

Single, multiple, modular sourcing: what does it mean?

You have probably heard of global sourcing. But do you also know what single, multiple and modular sourcing are? Let's shed some light on the matter and take a quick look at what these different sourcing concepts are.

What is global sourcing?

"International procurement is characterised by the fact that the delivery and receiving points of the procurement items are located in different countries. When this is deliberately expanded into a cross-functional strategic orientation of procurement activities, it is nowadays often also referred to as global sourcing. The difference from national procurement lies in taking the particularities of international transactions into account." - (Kuhlang et al., 2010)

As expected, in global sourcing the delivery and receiving points are in different countries. But the essential point is that it is a deliberate expansion of strategic procurement that focuses on the particularities of international business.

What are single and multiple sourcing?

Single sourcing means having only one supplier per procurement item. Multiple sourcing is the counterpart to single sourcing. Here, several suppliers are used per procurement item.

What is modular sourcing?

"As modularisation of complex products and the reduction of vertical integration become increasingly widespread, procurement is responding to this development with the modular or system sourcing concept. By procuring ready-to-install assemblies or systems, the effort in procurement and assembly is reduced thanks to a small number of parts and suppliers." - (Kuhlang et al., 2010)

In modular sourcing, then, it is not raw materials that are procured but ready-to-install assemblies or systems.

Global sourcing: advantages and disadvantages

As discussed above, in global sourcing the delivery and receiving points are in different countries, and it is usually a deliberate expansion of strategic procurement activities. The difference from national procurement lies in taking the specifics of international transactions into account.

Companies have always procured internationally, especially in industry. Recently, however, factors such as international competition, rising cost pressure and the need to safeguard competitiveness have led more and more companies to procure internationally. A major contributing factor is that international suppliers can deliver ever better quality at comparatively low cost.

So what are the advantages of global sourcing? The advantages of global sourcing include:

• greater supply security by reducing dependence on a single procurement market
• preventing suppliers from holding monopoly positions in the national market
• making use of international know-how
• gaining market knowledge and increasing export opportunities in markets where the company is not yet present
• offsetting currency risk for export-dependent companies

Source: Kuhlang et al., 2010

But global sourcing does not only bring advantages. The disadvantages include:

• loss of image through sourcing abroad
• the risk of an unwanted transfer of know-how abroad (e.g. to China)
• communication problems due to linguistic and cultural differences
• higher transport risks and longer transport times
• supply risks due to political and economic instability in the supplying countries
• quality problems
• greater administrative effort

To implement global sourcing, you need, for example, a logistics supply strategy and possibly language training for employees.

What are the prerequisites for global sourcing?

To practise global sourcing, you need:

• procurement market studies
• verification of quality standards
• supplier evaluations
• a logistics supply strategy
• protection agreements so that know-how cannot flow out to the supplying country
• possibly language training for employees

Source: Kuhlang et al., 2010

Finally, let's look at the different forms of global sourcing:

• quasi-national procurement: purchasing materials that consist of components manufactured abroad
• indirect international procurement: purchasing goods from abroad via an intermediary who guarantees quality, price and delivery reliability
• direct international procurement: procuring directly from foreign suppliers
• multinational procurement: a dedicated procurement organisation is set up abroad
• globally coordinated procurement: subsidiaries and other business units are used to enable worldwide procurement

So we can see: global sourcing offers a wide range of advantages and in certain areas is simply necessary to stay competitive on cost alone. At the same time, however, global sourcing also comes with disadvantages and a certain overhead.

Single and multiple sourcing: advantages and disadvantages

The principle of single sourcing and multiple sourcing is probably the simplest of the concepts presented here. Essentially, it is about procuring a material either from just one supplier or deliberately from several suppliers.

What are the advantages of single sourcing?

• simplified coordination thanks to a smaller group of suppliers
• improved communication through closer cooperation
• improved quality through shared quality assurance systems
• price and terms advantages through larger purchase quantities
• benefiting from the supplier's experience effects
• fewer problems protecting know-how

Source: Kuhlang et al., 2010

By contrast, what are the advantages of multiple sourcing?

• the ability to cushion production disruptions and interruptions at the supplier
• greater flexibility when demand fluctuates
• avoiding dependencies
• lower prices through competition between suppliers

Source: Kuhlang et al., 2010

Dual sourcing is an intermediate step between single and multiple sourcing. Here you work with exactly 2 suppliers per procurement item. Compared with multiple sourcing, the coordination effort is relatively low, but at the same time the risk is spread, because you are not dependent on just one supplier.

A special form of dual sourcing is cross sourcing. Here, too, there are 2 suppliers per procurement item, but the supplier base is reduced by procuring several goods or services from each supplier. This means that each individual item is sourced from 2 different suppliers, but other items are also sourced from each of these suppliers. The coordination effort thus comes even closer to that of single sourcing, while you still retain the benefits of spreading risk.

Overall, there is no perfect solution for the number of sources of supply. In practice, the sourcing strategy often also depends on the product in question. So it can make sense to use single sourcing for specific products and multiple sourcing for standard mass-produced goods.

Modular sourcing: advantages and disadvantages

As discussed above, modular sourcing means procuring ready-to-install assemblies or systems. The resulting smaller number of parts to be procured reduces the effort in procurement and assembly.

So what is the difference between a module supplier and a system supplier?

A module supplier mainly takes care of producing and delivering components. A system supplier, by contrast, also handles research and development, at least in part, and thereby builds up in-depth expertise in the product (cf. Kuhlang et al., 2010).

But modular sourcing covers not only the production and delivery of goods, but also assembly services. Procurement tasks such as materials planning, purchasing, goods receipt or quality assurance can also be handed over to the supplier. The closer cooperation naturally results in a longer-term partnership. There is a deeper exchange about development, manufacturing and logistics processes, so that continuous improvements and innovations can be developed.

More and more industries are turning to modular sourcing. These include the automotive industry (e.g. for brake systems or seat sets), the computer industry (e.g. for hard drives) and, in the food sector, the dairy industry (e.g. for fruit preparations for yoghurts).

Conclusion: Modular sourcing is an interesting field, and it will be exciting to see what developments the future brings here.

In practice: Lederhosen AG

Let's look at all this using our fictional company, "Lederhosen AG". Lederhosen AG is a traditional mid-sized company that produces and sells traditional Alpine clothing such as lederhosen and dirndls. It has to supply its own shops as well as its online shop and retailers with products.

Lederhosen AG is a very traditional and also patriotic company, which is why most of its products are produced and procured not only nationally but even regionally. Even so, Lederhosen AG continually reviews which articles should be procured and how.

Because a long-standing supplier recently dropped out at short notice, causing supply shortages for certain products, Lederhosen AG is now asking how this risk can be minimised in future.

The supplier that dropped out was the only supplier for certain raw materials, in other words single sourcing. The motto now is to no longer depend on just one supplier. So the company discussed whether to source these raw materials in future from a second supplier (dual sourcing) or straight away from several suppliers (multiple sourcing). After some discussion, it concluded that dual sourcing is the better approach. Why? Because a second supplier alone significantly reduces the risk compared with having only one supplier, while also minimising the effort of coordinating with different suppliers.

There was also a need for discussion in a second area, namely the "Almwiese" traditional watch. For this product, Lederhosen AG had so far assembled individual components of the movement itself, namely the dial it produced in-house. However, this was not a truly sustainable solution, as Lederhosen AG is simply not specialised in watchmaking, and so the quality did not reach the desired level. For this reason, Lederhosen AG switched to modular sourcing for the "Almwiese" traditional watch, and now sources the entire movement from one supplier and only "assembles" the leather straps in its own production.