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Navigating single sourcing

Single sourcing is the custom of appointing only one supplier for the provision of a good or service when others are available in the market. Image: Shutterstock/ESB Professional.

Argon & Co’s principal consultant, Andrea Carnino, writes in this op-ed for MHD about navigating single sourcing, understanding power, pitfalls, risks, and strategies for mitigation.

If you work in procurement (sometimes reductively referred to as “purchasing”), chances are you are familiar with the term “single sourcing” and that you’ve been instructed to fear it, recognise it, and avoid it at all costs.

Which, for a department in charge of cost savings, would already be a contradiction. But what do we exactly mean by single sourcing, and why are we not comfortable with such a practice?

Part I – Should we put all our eggs in one basket?

In simple terms, single sourcing is the custom of appointing only one supplier for the provision of a good or service when others are available in the market.

Such decision should come from upper management and be linked to the category strategy, but in reality – and this is something we see all the time in consulting, particularly in Asia – it’s simply common practice to take advantage of the cheapest price, quite often overlooking the risks.

But there’s a catch. Suppliers are smart. In most cases they will propose a “sticky” agreement, something that will make it difficult, or costly, for your organisation to get out of and change to another provider.

It may not even be obvious, but you can get the feeling of being caught into one of these deals when the general comments about a proposed change of supplier are “oh, but they know our business so well.”

So, to respond to the title, should you put all your eggs in one basket? I’m a consultant and I can’t help it, so my answer is: well, it depends. Your approach should always consider multiple factors. To name a few:

  • your category strategy for that good or service – e.g., if it is a critical supply, then it would probably be wiser to engage with more suppliers in long-term relationships rather than adopt a buy-from-the-single-cheapest behaviour;
  • the amount of savings you can bank – e.g., if there is a sensible cost reduction by purchasing from the cheapest supplier only, then you could mitigate disruptions by increasing the safety stock;

Part II – Self-inflicted single sourcing

As you know – either because you’re a seasoned procurement practitioner or because you read Part I above – there are several benefits in adopting single sourcing.

First, you save money by choosing the lowest price for a good or service, while maintaining a standard and consistent level of quality, minimising your ordering costs and creating a strong relationship with your supplier.

In exchange for this, you potentially expose your organisation to higher risks of delay or disruption, you lose competitive tension and awareness of innovation in the marketplace.

These second aspects are normally the reason why many corporations decide to avoid single sourcing and prefer to maintain dual or multiple relationships, sometimes even if the category strategy (if any…) would suggest otherwise. Irrespective of the circumstances though, you will still find some categories of spend where single sourcing managed to creep in.

But why is that so? The most honest answer is because we are creatures of habit. Dealing with a well-known situation makes us feel comfortable and change is hardly ever embraced with enthusiasm (despite being the only constant…).

In procurement, this opens the door to suppliers tailoring and customising their offer in a way that can make it look like there’s no other suitable provider in the market. And in most cases, this happens slowly through the course of a few years (likely a contract term plus extension).

An example from my past.

  • A multinational corporation leader in document repository operates widely in Southeast Asia. They need an agile fleet for their daily collections and deliveries, and they have become quite reliant on the knowledge and skills of the drivers. Unsurprisingly, the external logistics provider, who covers roughly 50 per cent of the volumes, has been their supplier for over 15 years. When launching tenders in the past, no other vendor could match their prices or guarantee the same service levels.

Part III – Little negotiation power doesn’t mean no power at all

But what if there really is only one supplier? This is then “sole sourcing” and I’m not going to lie to you, you’re not in a great negotiating position.

Examples of this fall under two groups:

  • real monopolies, like water or electricity – although many countries have seen a certain degree of liberalisation of the market in the past decade or so;
  • proprietary lock-in, like in the case of proprietary spare parts, very specific products and services or branded items.

Albeit few, literature says there are some advantages in sole sourcing, like the simplicity of managing only one supplier and the fact that the procurement processes are not time –consuming – well, at least you won’t have to run long and complex tenders. But these are meagre consolations.

In case of monopolies, there’s not much you can do. Your organisation’s size may help obtain some discounts or rebates, but in general you’re a price taker, so you should focus on becoming a more attractive account to the supplier. Using the famous Customer Preferencing Model, this means moving from nuisance to development, or from exploitable to core.

If instead you find yourself in a proprietary lock-in, the good news is that you have a few options. The bad is that they are difficult to put in practice. To start, the tip of making your business more attractive remains valid.

Then you may apply a similar reasoning to that used in the self-inflicted single sourcing: challenge the organisation to operate differently, thus trying to eliminate the need of that particular good or service which only that supplier can offer.

Most likely, this will require a task force that goes beyond procurement alone and involves people from other departments like operations, quality, risk, IT, and logistics.

And finally, remember the title of this Part III and don’t confuse little negotiation power with no power at all.

Andrea Carnino, Principal Consultant, Argon & Co

For more information on Argon & Co, click here.

 

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