Single-source sensor module: dual source, buffer stock or redesign
A medical device manufacturer buys a sterilised sensor module from a single German supplier. Annual volume is 24,000 units at €86; lead time 22 weeks; on-time delivery 81%. A quality failure eight months ago stopped the line for three weeks and cost £420,000. The supplier is at 92% capacity, refuses buffer stock, and has 18 months left on a three-year contract with no termination for convenience. A Malaysian supplier can produce at €78 but needs €350,000 tooling and nine months' qualification; minimum order 10,000 units. Demand forecast error is ±30%, and the product life cycle is four years. The board asks whether to dual source, hold more stock, or redesign the module. The category is 31% of finished-goods cost. Engineering says redesign would take 14 months and cost £600,000.
1. Position the sensor module using Kraljic and explain the implications for sourcing.
Read the worked answer
Profit impact is high: 31% of finished-goods cost and a line-stop cost of £420,000. Supply risk is high: single source, 22-week lead time, 81% on-time delivery, supplier at 92% capacity, refusal to hold buffer stock, and no termination for convenience. On Kraljic this is a strategic item, not a leverage item. The implication is that price negotiation alone is inadequate. The manufacturer needs a supply continuity strategy: supplier development, capacity reservation, buffer stock, a qualified second source, and contract terms that give visibility and exit rights. Because demand error is ±30% and the life cycle is four years, the strategy must be flexible; a long-term sole-source commitment without volume bands or exit rights increases lock-in. The module should also be considered for design review, but redesign is a medium-term option, not an immediate fix.
2. Evaluate dual sourcing, buffer stock and redesign, using the numbers where possible.
Read the worked answer
Dual sourcing: the Malaysian price is €8 lower per unit, or €192,000 a year at 24,000 units. The €350,000 tooling would pay back in about 1.8 years, inside the four-year life, before qualification and quality costs. But nine months' qualification and a 10,000 minimum order mean it is not an immediate solution. Use the incumbent for continuity while qualifying the second source.
Buffer stock: 12 weeks of demand is 24,000 × 12/52 ≈ 5,538 units. At €86, the stock value is about €476,000. Holding cost at 18% is about €85,700 a year. That is significant but less than the £420,000 cost of one three-week stoppage. A smaller buffer of 6-8 weeks may be more efficient if paired with supplier improvement.
Redesign: £600,000 and 14 months is slower and more expensive than dual sourcing, though it may reduce dependency in the long term. It should be a parallel engineering study, not the primary response.
Recommendation: negotiate buffer stock and capacity visibility with the incumbent, qualify the Malaysian source, and keep redesign as a contingency. Dual sourcing is the best balance of cost, risk and time, provided quality is proven.
3. How should the manufacturer negotiate with the incumbent while qualifying the second source?
Read the worked answer
Negotiate from a clear position: the manufacturer needs continuity, not a public threat. First, share forecast ranges and ask for a capacity reservation, a buffer-stock arrangement and a service-improvement plan with milestones. Link any price review or contract extension to measurable improvements in on-time delivery and quality. Seek a termination for convenience or a reduced notice period, and a change-of-control clause. Do not reveal the Malaysian source as a threat before qualification; use it as a legitimate resilience requirement. If the incumbent refuses buffer stock, quantify the risk and propose a cost-sharing arrangement. Keep the relationship cooperative because the incumbent remains the only approved source for at least nine months. The objective is a dual-source future with a better incumbent, not a zero-sum price cut.