Why Electronics Manufacturers Should Adopt a Multi-Source Strategy to Reduce Risk

Electronic equipment manufacturers and their supply chain partners manage thousands of raw materials, components, subsystems, and parts required to build their products. The last thing they need is a sole-source supplier to tell them the part they ordered is back-logged, or worse, they no longer supply it.

Tracking down alternate sources that can deliver a replacement part takes time and adds cost. Join us as we explore the benefits of a multi-source strategy, including a cautionary tale of this exact scenario from the industry’s past.

Why a multi-source Strategy is Crucial

Many electronics manufacturers employ a multi-source procurement strategy to avoid relying on a single source. If one supplier doesn’t have the part, others will likely have it in stock. This approach minimizes the chance of part shortages disrupting production and resulting in lost revenue.

Another reason manufacturers adopt the multi-source strategy is localization. Global manufacturers typically engage suppliers that serve specific regions of the world. For example, one or more suppliers may serve the North American market, while others serve the Asian and European markets. The finished product in each regional market may be close to identical and perform equally well, even though they have different components. 

A concern of this model is the disruption of component supply in one or more regions. For example, China’s semiconductor industry has weakened recently, causing bottlenecks for its rapidly growing industrial customers. At the same time, U.S. restrictions on using Chinese-made semiconductors prevent it from developing applications with advanced technologies. 

Varying appetites for risk

Not all manufacturers will make the same decisions regarding sourcing components. One reason is that risk attitudes vary from company to company. They cover a continuum, ranging from risk avoidance to risk neutrality to risk preferring. 

Multi-sourcing strategies help companies manage risk and grow revenue because multiple suppliers ensure they can keep up with increased customer demand. Of course, adopting a multi-sourcing approach introduces risks that can be challenging for manufacturing resource planners facing complex market environments. 

Still, the chance of part shortages must be considered and planned for because they could result in lost revenue. 

Although supply chain teams are adopting multi-source procurement, there needs to be more data on how efficient and reliable these programs can be for companies with diverging attitudes toward risk, ranging from risk avoidance to risk neutrality to risk preference. 

Moreover, multi-sourcing strategies can introduce risk that could lead to inconsistent quality between the regional markets. Also, manufacturing resource planning systems can be complex, and multi-sourcing can be challenging for software systems companies. These issues may require more strategic sourcing technology to help companies identify and source from multiple suppliers.

How a Fire 24 Years Ago Transformed the Industry’s Approach to Risk 

In March of 2000, a single lightning strike caused a power surge, leading to a fire in the Philips Electronics Alburquerque semiconductor manufacturing plant. This plant produced radio-frequency chips for Nokia cell phones. 

Plant personnel responded quickly and extinguished the fire within 10 minutes. However, the fire produced smoke, triggering sprinklers that wreaked havoc on the chip production line. The combination of fire, smoke, and water contaminated millions of chips stored for shipment. 

At a Nokia plant 4,000 miles away outside Helsinki, a production planner managing chip inflows from Philips failed to get the routine input needed. He informed the plant’s purchasing manager and passed word about a possible problem to Philips’s top component purchasing manager.

Recognizing that Philips’ problem might have negative effects on the production of mobile phones, Nokia took three key steps:

• A team of executives and engineers presented Nokia’s concerns to Philips leadership, including its CEO, Cor Boonstra. Philips responded by adjusting factory outputs as far away as Eindhoven and Shanghai. 
• A second team redesigned certain chips so other Philips and non-Philips plants could produce them. Where appropriate, the team reviewed changes with Philips leadership to assess any unforeseen impact of the design changes. 
• Finally, a third team sought alternative manufacturers and suppliers to reduce the pressure on Philips. They received two supplier responses within a week. 

At the same time, Ericsson eliminated its backup suppliers to cut costs, which resulted in a sizable loss that contributed to Ericsson’s decision to exit the mobile phone manufacturing market. 

As a result, Ericsson suffered significant losses in the following months, including: 

• A second-quarter operating loss of $200 million in its mobile phone division
• $1.68 billion in annual divisional losses six months later  
• 3% loss of market share
• Corporate operating losses of $167 million

This led the manufacturer to withdraw from the mobile phone market. This example speaks volumes about the value of purchasing from a primary supplier while maintaining a set of backup suppliers that can be tapped in times of high demand without missing a beat.

A Timeless Cautionary Tale 

In today’s complex market environment, global companies must ensure stable supply chains and develop differentiated multi-source procurement strategies by mitigating supply chain interruptions. At certain times, global companies should select two or more trusted suppliers to share the risk of an interruption in availability.

Decision-makers need to establish effective and stable order planning, which is the key to implementing a multi-source strategy under the risk of supply interruption. While many organizations have varying levels of risk appetite, the industry must operationalize risk management by applying reliable intelligence and forecasting. 

Supplyframe’s Design-to-Source Intelligence solutions allow every level of the organization to achieve visibility into risk and take effective actions to mitigate it. Design, engineering, procurement, and supply management teams can collaborate within a single platform by viewing a “living BOM, ” including a Risk Index score for each part. 

This score is broken down into key factors like stock, lead time, lifecycle status, and years to end-of-life. Supplyframe’s real-time intelligence on over 650 million components empowers today’s leaders to take a proactive approach to risk, multi-source, and avoid the mistakes of the past. 

To learn more, visit Supplyframe.com today.