Dual-Sourcing a Precision Connector
A contract electronics manufacturer spends $4.44M annually on a precision connector (2.4 million units at $1.85). The incumbent in Taiwan is the sole source, quoted at 16-week lead time, 1,200 ppm defects, and 82% on-time-in-full. Late-line stoppages and air freight expedites cost about $600,000 per year. A Vietnamese supplier quotes $1.96 per unit, a 12-week lead time, 300 ppm defects, 95% OTIF, and a $180,000 tooling charge; qualification and ramp would take six months. The Vietnamese supplier requires a 60% volume commitment to hold price. The customer's contract has a 2% annual price-down and penalties for line stoppages. The incumbent has offered a 3% price cut but no service improvement.
1. Build a total-cost comparison. Show your calculations and state the assumptions that most affect the decision.
Read the worked answer
Annual volume is 2.4M units. Incumbent spend: 2.4M x $1.85 = $4.44M. Vietnam piece-price premium: 2.4M x ($1.96 - $1.85) = $266,400 per year. Tooling: $180,000; amortized over three years = $60,000 per year. Quality: incumbent 1,200 ppm = 2,880 defective units; Vietnam 300 ppm = 720; difference 2,160 units. At an internal cost of $85 per defect (scrap, rework, containment), savings = $183,600. Expedite: $600,000 current; if Vietnam's 95% OTIF cuts this by 60%, savings = $360,000. Net annual benefit before working capital = $183,600 + $360,000 - $266,400 - $60,000 = $217,200.
Shorter lead time by four weeks also reduces pipeline inventory: roughly $4.44M x 4/52 = $341,500, worth about $68,000 per year at a 20% carrying cost. The case for change is positive but not overwhelming; the decision hinges on whether the expedite and quality savings are real and on risk, not piece price alone. If expedite savings are only 30%, the net benefit shrinks to about $37,000 and the risk premium may not justify switching.
2. Recommend a sourcing structure and the contractual terms you would require. Address the 60% commitment and the risk of dual sourcing.
Read the worked answer
Use a dual-source structure rather than a full switch. Award Vietnam 60% to satisfy its commitment and capture service and quality benefits, keep the incumbent 40% for continuity, and write a 12-month ramp with quality gates at 300, 500, and 800 ppm. Do not give Vietnam 100% while it is unqualified; a single-source failure at the customer would trigger penalties.
Contract terms: tooling ownership and portability, capacity reservation, 4-week buffer stock or consignment, right to audit, change-notification, price-down matching the customer's 2%, currency adjustment, OTIF and quality penalties/bonuses, and an exit clause. Require the incumbent to compete for the remaining 40% on service, not just a 3% price cut. Track total cost quarterly. The 60% commitment is acceptable only if volume is firm, liability is capped, and the remaining 40% can be reallocated if performance misses. This balances the customer's stoppage risk with the need to reduce sole-source exposure.