How to Best Understand Supply Chain Multisourcing

Executive Summary

• Multisourcing is the use of sourcing from multiple providers and uses logic to make a selection.
• We cover how multi-sourcing works.

Introduction

Within supply planning systems, in most instances, single locations are assigned to fulfill the demand of internal locations. Multisourcing is the opposite of this and can mean the fulfillment of requests from more than one but up to many sources of supply.

• Multisourcing is the ability of a supply planning system to choose between alternate sources of supply intelligently. This can apply both to the selection of suppliers and to the selection of a source of supply along with the supply network for internal locations.
• The functionality’s driving logic can be multidimensional, from total costs to meeting order dates, etc..

The Reasons for Multisourcing

• One common reason for multi-sourcing is when one location is the primary but cannot handle the order’s capacity. Then, the supply planning system would move to a second or third location to satisfy the demand.
• Another reason can be to spread, by rough percentages, the total demand among various sources of supply to meet contract responsibilities.

The Reality of Multisourcing

Very few supply planning applications can perform multi-sourcing. And I am unaware of any ERP system that can do this. Some applications like SAP SNP that are sold on the ability to perform multi-sourcing cannot practically do so because of the computation time. Therefore, after significant expense, the functionality is turned off by companies implementing it.

For this reason, in most instances, multi-sourcing continues to be a manual decision and a change made to the purchase order or stock transfer. Sourcing teams within companies contain individuals who know the various sources of supply. They alter the purchase order or stock transfer to account for the need.

Multi-sourcing motivates companies to implement cost optimization, as it is stated that the cost optimizer can be used to perform multi-sourcing. It should not be assumed that your company can get multi-sourcing to work. Still, multi-sourcing is a major motivating factor for selecting cost optimization as a supply planning method.

Multi-Sourcing Due Diligence

Before merely assuming your company will be able to enable multi-sourcing successfully and, therefore, choosing cost optimization, it makes sense to evaluate the problems other companies have had in activating this functionality and the likelihood your company has in doing the same.

Introduction to Multi-Sourcing

One of the exciting features of software selection is why companies select one method of supply planning over another.

The primary reasons companies select cost optimization are:

• To perform constraint-based planning.
• To perform multi-sourcing.

Constraint-based planning is the ability to restrict capacity, primarily in the production resources. Although hypothetically, companies are told other supply chain constraints will constrain them. Constraints like transportation and warehousing.

Multi-Sourcing

Multisourcing is the ability to pull sourcing from multiple locations and to make decisions based on costs. It is easy to set up locations as sources of supply for an area, and this is performed in all supply planning systems through the master data setup by making the locations valid to and from the shipping point. The logic for when to source from one location versus another and making this match the business requirements is where the trick comes. Cost optimization accomplishes this with transportation lane costs and resource constraints.

The Multi-Sourcing Requirement

In the perfect state, one location would have a higher cost to supply the second location. However, when the primary sourcing location runs out of capacity, the optimizer, in concept, will move to the secondary supply source without the planner having to do anything. The diagram below can be used to help understand this.

In one scenario, two producing locations have been set up as sources of supply for Location A, which is a DC. Suppose the requirements are within location B’s capacity. In that case, location B fulfills the requirements from location A because the transportation lane cost is only $1 per mile versus $2 per mile as with location C. When the costs are set up this way, nothing further needs to be done. The system will naturally source from location B.

However, if, in any one period, the requirements are higher than 100 units, location C will begin to serve as a source of supply to location A.

Suppose the resource that produces the product for location A goes down for maintenance. In that case, the resource has no capacity in location B, and C becomes the sole supply source for this material to location A.

A primary reason this is so appealing is that this hypothetical example auto-adjusts. Executive decision-makers love this idea and foresee significant cost savings from such a system. However, the reality of what tends to occur with multi-sourcing differs from this hypothetical example.

The Reality of Multi-Sourcing in SAP

The fact is, in SAP SNP, at least a few companies make the jump to multi-sourcing. There are several reasons for this, which should be considered when selecting both a supply planning method and software.

1. SNP is a very high-maintenance application. This means there are many other issues to fix and focus on before multi-source can be reviewed. It can often be years of fixing problems and concentrating on other things until multi-source can be reconsidered.
2. Multi-source significantly increases the run time of the optimizer.
3. Several clients I have had that started with multi-source turned on turned it off because of the run-time specifically.
4. Turning on multi-sourcing, in addition to getting resource constraints right and keeping them updated, is a heavy burden for even the biggest companies, and both of these capabilities must be present for multi-sourcing to work. Therefore, while seeming relatively simple in concept, it is, in fact, one of the most evolved uses of cost optimization for supply planning.

Conclusion

The assumption that a company can multi-source with a cost optimizer drives a decision to the cost optimization method over others. It is not an assumption that is practical. To perform multi-sourcing with SAP SNP, a company must maintain the master data. They must do this for the multi-source option. But we must also spend money on the servers to make the multi-sourcing model run. In short, multi-sourcing is expensive to do.

If companies are unwilling to support this expensive solution, it makes little sense to head down this path. Right now, across the US, there are plans to turn on multi-sourcing in supply planning applications that may never work correctly. This is one of the major areas of cost optimization that promises great things. But which companies are not able to implement this successfully?

Connections

Multi-plant planning is considered (by this site) to be the second method within the Superplant Concept (see link for definition).