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One of the biggest parts of supply chain management is sourcing and collaborating with suppliers. While managing multiple suppliers at once is common for businesses, some companies may forgo working with more than one supplier and opt for single sourcing.
Supply chain trend analysts rightly predicted more just-in-case production, higher costs, and unexpected supply disruptions for this year, which has led businesses to finding new strategies to cope and stay competitive. This increased complexity and numerous other reasons have made single-supplier models far more appealing to some companies, and for some business needs, it’s the only route forward.
There are occasionally times when a buyer is faced with a single source of supply for an item because it is produced by only one company. But there are typically more suppliers available, leaving the buyer with some choices to make.
Single sourcing is one methodology a company can use for its supply chain, but it has its pros and cons as opposed to a multiple supplier strategy. Up ahead is a brief overview of the advantages and disadvantages of sole sourcing and what other factors to consider when weighing up working with single or multiple suppliers.
Benefits of Single Sourcing With One Supplier
Any business knows that there are several considerations when building a new partnership with an external organization. Finding a supplier based on one or two details isn’t always enough. If single sourcing is most appealing, there are a handful of advantages when it comes to a single supplier strategy.
Less Work Than Juggling Multiple Other Suppliers
Having a single source means there is less work involved in qualifying the source and probably less administrative effort to be expended. This is a real advantage when dealing with a highly technical product requiring significant engineering to qualify it or use it.
Simpler Supply Chains Than With Multiple Suppliers
Single-sourcing benefits also include a more simplified supply chain. Quality control becomes easier, especially when services and products come from a sole organization. When a company selects its only supplier, the procurement process can be easier in many ways and it can reduce costs and administrative work needed and save time.
Negotiations Are Still Possible in Single Sourcing
Because all the volume is given to a single supplier, the buyer has maximized their leverage based on total quantity. The business buying should make sure that this point is emphasized during negotiations concerning price, delivery, and so on. Price might be set, but a supplier may be willing to discuss lowering the cost or providing benefits in another way.
Single Suppliers Value the Relationship
Another one of the advantages of single-sourcing is closer relationships. A supplier should feel a special obligation to help the business that’s buying in terms of availability. Again, in the process of awarding this business to the supplier, the fact that the buyer’s company is relying on the supplier for material availability should be made clear.
Higher Quality Goods Are Attainable With Single-Sourcing
When you’re working with only one source the service or goods produced can often be better quality. Manufacturers and suppliers have time to understand the business’ strategy, expertise, and preferences, and therefore translate this into products that are higher quality and exceed customer standards.
Disadvantages of Single Sourcing With Only One Supplier
While expertise, cost, strong relationships, simpler supply chains, and protecting intellectual property are all great reasons to opt for sole sourcing, the benefits may be outweighed by the cons. If a company decides to opt for single sourcing over multiple suppliers, these are some disadvantages to be aware of.
Maintaining a Competitive Edge is Difficult
If there is only a single supplier, it is more difficult for the company buying to ensure that it is staying competitive. It is also nearly impossible to choose a supplier based on business needs and it may have to bend to the supplier in some instances. This can be balanced out by the single sourcing advantage of working closely with the supplier so it can understand the strategy and importance of the competitive edge. In many cases, they’ll only get more business if the company is successful.
Negotiations are Harder With Only One Supplier
Bargaining power may be limited, making it tougher to get reduced costs or favorable terms if working with one supplier or if only one supplier exists in a particular market. In periods of tight supply, businesses doing the purchasing may be at a disadvantage in being able to ask different suppliers to accept orders.
Supplier Relationships Are Difficult to Nurture
Other suppliers may lose interest in trying to compete for the business if they see that a sole-source situation is likely to persist. While it’s possible to improve supplier relationships, it can also be difficult to guarantee better service if said supplier is working with numerous other companies.
Sole Sourcing Requires a Backup Plan
Buyers may be facing a real risk if the single source has a catastrophic event, gets bought by a buyer’s competitor, or has financial problems, for example. While companies don’t necessarily need to be working with multiple suppliers all the time, being aware of the resources available they may need to decide the best plan of action for handling these obstacles if something happens with single sourcing or even if price fluctuations occur, supply disruptions take place, or quality issues arise.
Competitive Pricing is a Challenge with a Sole-Source Supplier
As mentioned, buyers may face a real risk if the single source has a catastrophic event, gets bought by a buyer’s competitor, or has financial problems. A business may also find it difficult to get better prices for services or products if all of its eggs are in one basket, which is often the case with single sourcing.
Creating a Plan for Single Sourcing
You may be thinking that all of the above are simply stating the obvious, and you would be correct. So, what does the professional purchaser do to make an informed decision before deciding on single sourcing?
They start by developing a plan for each commodity. This plan should include:
- Recent history of pricing and availability for the commodity.
- How many potential suppliers exist on a global basis? Buyers should not limit the plan to only domestic sources if, in fact, this is an important commodity or item to the company.
- Who the incumbent suppliers are and how satisfactory their performance has been over the past 12 to 24 months.
- How critical or strategic this commodity is to the buyer’s company.
- What demand is likely to look like in the future based on the company’s marketing and sales plan.
Once this information has been gathered, you will be in a much better position to make a smart decision regarding the number of sources for the commodity in question. Take risks into account, understand the benefits, leverage what you can, and businesses may be able to make the most of single sourcing.