In a paragraph or two explain the rationale underlying volum

In a paragraph or two explain the rationale underlying volume consolidation. What are the risks associated with using a single supplier for an item?

Solution

A firm can procure an item or raw input from different suppliers. But, it can create different issues. The first issue is the higher price of procurement of the item as relatively less volume is ordered from the one supplier. So, the cost of procurement will be high. The second issue will the difference in quality as each supplier will vary in quality, though meeting the basic specification required by the firm. The third issue will be the different lot sizes and related higher cost in procurement. Such problems, lead to the volume consolidation as firm can procure an item or goods from one or two supplier. It will reduce the price, reduce the unnecessary holding of excess inventory and bring improvement in uniformity of the quality of the item. Besides, a strategic and long term relationship is developed. So, firms prefer to go for volume consolidation.

There are following risk associated with the use of a single supplier of an item.

1. The supplier can raise the price of the item over a period of time and bargaining power can shift to the supplier side.

2. An issue with the supply or in the supplier’s setup, can disrupt the operations in the manufacturing setup of the firm. So, there is a high probability of disruption.

3. Overdependence upon the supplier and increased scope of getting isolated in the industry.

4. Any modification or challenges to the supplier, also affect the firm.

So, single supplier of an item can increase the risk quotient for the firm.