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 is typically more than one source available, leaving the buyer with some choices to make.
In these cases, buyers must carefully weigh the pros and cons of using a sole source.
Pros of Single Sourcing
- 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.
- Because all the volume is given to one source, the buyer has maximized their leverage based on total quantity. The buyer should make sure that this point is emphasized during negotiations concerning price, delivery, and so on.
- The supplier should feel a special obligation to help the buyer 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.
Cons of Single Sourcing
- If there is only one source, it is more difficult for the buyer to ensure that they are keeping their company competitive.
- In periods of tight supply, the buyer may be at a disadvantage in being able to ask other suppliers to accept orders.
- Other suppliers may lose interest in trying to compete for the business if they see that a sole-source situation is likely to persist.
- 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.
Creating a Plan
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?
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. A buyer 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.
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