A savings study on dual sourcing in the Defense Department

Abstract

This paper examines the issue of whether dual sourcing in the Defense Department leads to cost savings for the government. Past analysis has shown that second sourcing results in significant savings. Pricing data for four separate previously competed missile programs is examined. Major findings of the paper include: *All missile programs examined exhibited losses from dual sourcing. *Production Rate impacts play a significant role in explaining the difference in pricing among contractors involved in dual sourcing. *The amount of projected savings is sensitive to the contractors responsiveness to increases in output. The major implications of these findings is that a thorough analysis of the costs and benefits of dual sourcing in a particular program should be considered before introducing a second source.