Supplier Concentration at Halden Medical Devices
Halden Medical Devices assembles monitoring units sold to hospitals. A single supplier in another country provides the custom sensor module used in 80% of units. The supplier has had two quality escapes in six months, each causing a line stoppage of several days. Lead time is 14 weeks, and Halden holds only three weeks of sensor inventory. Hospital customers require 98% on-time delivery, and Halden is currently at 91%. Qualifying a second supplier would take about nine months and cost an estimated $400,000, with no guarantee of comparable pricing. The purchasing manager argues that dual sourcing is too expensive; the operations manager warns that another quality escape could cost a major hospital contract worth $9 million a year.
1. Assess the risk exposure and recommend whether to pursue a second supplier.
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The exposure is concentrated and severe. With one supplier for 80% of units, three weeks of inventory against a 14-week lead time, and repeated quality escapes, Halden has almost no buffer. Each stoppage already disrupts delivery; the 91% on-time rate is below the 98% contractual threshold, so the risk is not hypothetical - it is materializing.
The $400K qualification cost should be compared with the expected loss. A single lost contract worth $9M in annual revenue, at even a modest margin, dwarfs the qualification cost. Even a partial probability of loss makes dual sourcing economically attractive.
Recommendation: Pursue a second supplier, but stage it. Begin qualification now because of the nine-month lead time, and in parallel raise buffer inventory and tighten incoming inspection to reduce near-term risk. Dual sourcing is insurance priced against a credible, large loss.
2. What operational steps should accompany the sourcing decision?
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Sourcing alone does not fix the delivery problem; it must be paired with operational controls:
- Buffer inventory. Increase sensor stock from three weeks toward a level that covers a realistic disruption, balancing carrying cost against stoppage cost.
- Incoming quality gates. Add inspection or testing at receipt so defects are caught before assembly, not after.
- Supplier scorecards. Track the incumbent on defect rate, lead-time variance, and responsiveness, with contractual remedies for quality escapes.
- Customer communication. Proactively manage hospital customers on delivery performance rather than waiting for penalties.
- Split allocation. Once qualified, allocate volume between suppliers to keep both viable and competitive rather than shifting entirely.
The purchasing manager's cost concern is legitimate, so the business case should include expected savings from competition as an offset to the $400K.