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 practice? Let’s explore the definition of single sourcing, what the inherent benefits and risks are and the strategies to adopt in different scenarios. 

If you consider yourself an experienced procurement practitioner, feel free to skip Part I and jump directly to the juicier content of Parts II and III. 

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 very common, particularly in Asia – it’s simply common practice to take advantage of the cheapest price, quite often overlooking the risks. 

Wait, what risks? – you may righteously ask. If there are many suppliers, surely some of them will be able to deliver if we encounter an issue with the one we chose! In principle yes, and when there are abundant equivalent solutions (a situation as close as possible to the perfect competition), then it’s generally safe to choose only one, while having a backup supplier ready, just in case. 

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…” or “we’ve being working with them for a long time…” or “ok, but no one else can provide the same service/product” or the likes. This could be defined “self-inflicted single sourcing”, and you can read about it in Part II. 

A different situation is when only one supplier is actually available in the market (a so-called monopoly), in which case your choices and your power are limited. This is what is more precisely defined as “sole sourcing”, and that’s what Part III is about. 

So, to respond to the title, should you put all your eggs in one basket? The usual consultant’s answer comes in handy: 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; 
  • the complexity of your supply chain – e.g., if it takes a long time and/or many steps to receive a certain product from purchase order to delivery, the likelihood of something going wrong are generally high, so multiple sourcing (redundancy) or instead a local supplier (nearshoring) could be the best approach; 
  • the other risks involved – yes, there are many others to evaluate than just operational, like financial (is the supplier a healthy business or could they go bankrupt in a couple of years? You may need a backup then…) or currency (if appreciations/depreciations are likely, you can be opportunistic and balance volumes between a local and an overseas supplier depending on the current exchange rates). 

Now that we’re done with the definition, let’s delve into a couple of scenarios. 

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). 

Alternatively, there’s some sort of bias at play: you may become aware of a certain tool or solution and design your selection process around it, leaving little chances to other options. Simply put, the more prescriptive your specification, the narrower the market appears. 

So there you have it, the definition of “self-inflicted single sourcing”: a buying behaviour creating the very situation that limits your choices. 

A couple of examples. 

  • 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% 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. 
  • A more generic but relatable situation. A seller of packaging machines used in manufacturing also “happens” to supply the packaging materials that go with them– nothing wrong with this business model by the way! The seller may propose a deal where such materials are included in the offer, for example for the first year of contract, then will be provided at very competitive prices. When you tender them out in the second year, you struggle to get cheaper quotes and are challenged with compatibility issues and by the supplier suggesting that failures due to the use of different materials are not covered by the warranty. In this scenario, it’s not unlikely that the purchasing company will stick to both agreement and supplier for the entire life of the equipment. 

Although the steps to prevent this from happening vary, the strategy behind is the same: look at how that category is placed in the Supply Positioning Model (bottleneck, critical, leverage or routine) and act accordingly. In certain instances, this may mean that single sourcing is the right approach, and you will have to foster a long-term partnership and de-risk in a different way; in others, you may have to look at your internal processes to be less reliant on the supplier’s skills. In the first example, this meant investing in technology: a navigation system able to automatically plan and amend the best routes for deliveries and pick-ups, avoiding the need to trust the driver’s best judgement or past runs and experience. 

In parallel, go back to the basics and don’t forget what you learned from previous projects or studies. Distrust the all-inclusive offers, unpack the costs trying to evaluate all components separately, write your specifications in a simple and clear way, avoiding biases and unnecessary requirements that will just limit the landscape. All of this applies to the second example, for which the recommendation is to separate equipment and materials costs, push back on the warranty clause and pre-emptively scout the market for compatible materials (and their prices). 

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 it implies that 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 but 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. 

Ok… but how? How can a business be more attractive without extra money to offer? Well, money isn’t everything! The degree of complexity to achieve improvements varies, but if you really don’t know where to start, make these three points your priority: 

  • pay the supplier on time, adhering to the payment terms – no one likes to be paid late, and having to chase your organisation for late payment will put an unnecessary burden on the supplier’s accounting team; 
  • make it simple to interact with you – don’t overload the supplier with forms and modules to fill and if you use some form of automated procurement tool, make sure you provide guidance and help through the first few iterations; 
  • maintain a clear and open communication channel – appoint the right person in your organisation to be the point of contact for any issue and make sure you know who the supplier’s counterpart is. 

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! This piece of advice comes from a Category Manager in the telecommunication industry. Telecoms normally promote their plans by offering the latest smartphone in exchange for a long-term subscription, and when this smartphone is an iPhone, even the bigger corporations must abide to (most of) Apple’s terms & conditions (and prices). Specifically, this is a case of brand lock-in, as no telecom can afford not to offer an iPhone deal – customers would easily change operator. This gentleman I mentioned oversaw the relationship with the brand from Cupertino and he made no mystery of the challenges. But he righteously pointed out that price is not the only variable on the table. If you cannot negotiate price, as well as many other terms, then focus on what you can influence, as there will always be something: payment terms, delivery schedules, KPIs and service levels, order quantities, to only name a few. 

Find out more about Argon & Co’s Procurement service offering here

Andrea

Principal Consultant, Singapore

procurement.singapore@argonandco.com

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