Supply Planning Management

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 the vast majority of instances, single locations are assigned to fulfill the demand of internal locations. Multisourcing is the opposite of this and can mean the fulfillment of request from more than one, but up to many sources of supply.

  • Multisourcing is the ability of a supply planning system to intelligently choose between alternate sources of supply. This can apply both to the selection of suppliers as well as 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 location, but cannot handle the capacity of the order. Then the supply planning system would move to a second or even 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 actually cannot practically do so because of the computation time. Therefore after significant expense, the functionality is turned off by companies that implement it.

For this reason, in the vast majority of 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 what the various sources of supply are. They alter the purchase order or stock transfer to account for the need.

Multi sourcing is a motivator for 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 will be able to get multi-sourcing to work. Still, multi-sourcing is a major motivating factor for the selection of cost optimization as a method of supply planning.

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.

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, they will be constrained by other supply chain constraints. Constraints like transportation and warehousing.

Multi-Sourcing

Multisourcing is the ability to pull sourcing from multiple locations and to make decisions based upon 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. The way that cost optimization accomplishes this is with the combination of 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 then move to the secondary source of supply, without the planner having to do anything. The diagram below can be used to help understand this.

In this scenario, two producing locations have been set up as sources of supply for Location A, which is a DC. If the requirements are within location B’s capacity, 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 in this way, nothing further is needed 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.

If the resource that produces the product for location A goes down for maintenance, the resource has no capacity in location B, and C becomes the sole source of supply 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 is quite a bit different 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, and these reasons should be considered when selecting both a supply planning method as well as selecting software.

  1. SNP is a very high maintenance application. This means that there are always many other issues to fix, and other things to focus on before multi-source can be reviewed. It can and often is years of fixing problems and concentrate 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, ended up turning 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 will be able to 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 must also spend on the servers to make the multi-sourcing model run. In short, multi-sourcing is expensive to do.

If companies are not willing 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 successfully implement.

Connections

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

References