Second-Source Strategy

Anyone who builds a device buys most individual parts from other companies. A phone manufacturer makes neither the camera nor the memory chip itself. This is exactly where a risk arises: if the one company supplying the part suddenly can’t deliver, the entire production comes to a standstill. The second-source strategy is the answer to this. For every important component, a second supplier is sought who can deliver the same or a very similar part. The English term literally means “second source”.

Why a single chip supplier is dangerous

A single supplier is what’s called a single point of failure, meaning a spot where a single failure can paralyze the entire system. If something fails there, no substitute helps. Failures happen more often than one might think. An earthquake, a fire in a factory, an export ban, or simply an overcrowded order list are enough.

This was clearly visible during the Covid pandemic. Car manufacturers couldn’t deliver finished vehicles because small control chips were missing. Some of these chips cost just a few euros but held up cars worth 30,000 euros. Those who had a second supplier got through this period noticeably better.

The second reason is economic. A supplier without competition can set prices almost freely. As soon as a real alternative exists, the buyer’s negotiating position changes. Even just the possibility of switching drives the price down.

What a second supplier must deliver

For the strategy to work, the replacement part must be truly interchangeable. For simple components like screws or capacitors, this is easy. For complicated electronics, it is elaborate, because size, connections, and behavior must match exactly. That’s why companies often decide as early as the product design stage that two variants of a component should be usable.

The second supplier usually gets only a smaller portion of the orders, often 20 to 30 percent. That’s not enough to replace everything in the event of a failure. But it does keep the contact active and the parts tested. A supplier you only call in an emergency needs months before it can send usable goods.

This isn’t free. Two suppliers means: two contracts, two quality inspections, smaller order quantities, and therefore worse prices per unit. Second sourcing is thus a kind of insurance. You pay a bit more on an ongoing basis so as not to be completely knocked out in an emergency. That’s precisely why companies don’t apply it to every part, only to the critical ones.

Second sourcing in the dispute over AI chips

In the news, the term currently appears mainly in connection with graphics chips for artificial intelligence. These specialized chips are the most expensive component in data centers where AI models are trained. The market is dominated by a single manufacturer whose chips have long lead times. Large customers like Microsoft, Amazon, or Meta are therefore actively searching for alternatives.

They do this in two ways. They additionally buy from smaller competitors, and they develop their own chips for their data centers. Both are second sourcing in the classic sense. So when you read that a corporation wants to “become less dependent on Nvidia,” that’s exactly the principle at stake.

However, the term is encountered far beyond the chip industry. Companies also talk about second sources for electric vehicle batteries, medications, or cloud providers. A related term is vendor lock-in: the dependency on a single provider that one can only escape at high cost. Second sourcing is, at its core, planned prevention against exactly this trap.