Whether its design specifications, or traditional attitudes, sometimes procurement gets painted into a sole sourcing corner.
This article was first published on Future Proofitable.
I am jealous of those who have never had to deal with true sole suppliers. I think IT buyers will understand me best. It’s just not that much fun. Let’s take a closer look at what sole or single sourcing is, and how best to deal with it.
I will cover the subject in two articles. The first one covers what it is, and the second will contain tips and hints how to deal with these situations.
Spot the Difference
If you there are a few suppliers in the market who you could buy from, but you choose to stick with one supplier (leaner supply chain, eliminated duplicating logistics and management, administration costs), you have a classic single source situation.
If there is only one supplier in the market, and no alternatives, you have a sole sourcing situation.
There are many office cleaning services providers out there in the market. However, for a list of very good reasons, you choose to outsource it to one service provider. That would be single sourcing.
Now, imagine five different suppliers working on your ERP system creation and implementation at the same time, doing the same job for the same part of scope. Not fun.
Or imagine that your supplier comes up with exactly the product you need for your manufacturing process, but patents it and keeps on increasing the price at every opportunity. Even less fun.
How Does It Happen?
For single sourcing, the option is deliberate choice. There are many advantages to it:
- You keep the competition, because the supplier can be easily replaced. Negotiation leverage is at its maximum level like this.
- At the same time, you spend less time for supplier management and supply chain administration.
- You have consistent quality of items or services delivered. Or, if not, deal with it in one go.
- You eliminate all non value-adding activities (some examples here).
- The supplier will be more willing to work with you on various cost reduction or services improvement initiatives.
- The threat of losing business in the future will be a big motivator to not overcharge you.
There are a variety of reasons why a sole supplier situation can form. Some are more to do with perception and resistance to change, while others are truly sole supplier situations. They can be categorised in three ways.
1. True Sole Sourcing
Where your company might depend on one supplier without any escape routes. For example:
- Market monopoly – utilities (water, gas, electric); Governmental services.
- Patents – technical designs; chemical formulae.
- Lack of supply alternatives.
2. High Exit Barriers
There are situations when due to various barriers (most often financial – switching costs) competitive situations turn into sole supply situations. For example:
- Equipment investment – when supplier provides plastic granules storage and supply systems; cleaning chemicals’ supplier provides funds for equipment.
- Digital solutions (and their switching costs) – you may have had big leverage during first negotiations, but once the initial contract period is over you find yourself dependent. The supplier is technically not sole source, but switching costs are so painful that it gradually turns into one way street of constantly increasing maintenance bills.
- Manufacturing supply chain integrations – this can often happen naturally, or through pre-existing relationships between different tiers of suppliers. Along the way, one supplier is sold to another, or bought out, and a partnership is ended even though production lines are tied together.
- Industry regulations (or agreements) – for instance, in order to be able to insure cash in a safe, an insurance company might require a specific quality certificate from a very specific certification organisation. In this case, there is really only one option for supply.
3. Pseudo Sole Sourcing Situations
Frequently, evaluating the situation in the business is more about perception and will, rather than based in fact. Identifying these can bring big benefits.
- Business users’ preferences – surprisingly, there are quite a few categories of spend where business users are permitted to have preferences. Next time you complain about resistance from stakeholders, consider the number of colleagues who work with particular safety equipment, or similar. And yes, over time, people tend to form preferences for brand name products. Implementing any change might be challenging.
- Historical heritage – the classic “we’ve always done it this way” situation. It always been bought from this supplier, and only this supplier.
- Business’ requirements – technical specifications, prepared by engineers. Delivery requirements, set by business users. Packaging requirements, defined by operations or logistics or marketing.
So now you know how these situations may occur. The question is, can you do anything about it? And how? You’ll have to come back to find out more!