The Risks of Single Sourcing

By on March 21st, 2011

Many organizations find themselves with a single source supply of one or more raw materials, components, products, or services.  It is not hard to understand why.  With single sourcing, you manage one known contact point, have lower purchasing administration costs, and quicker decision cycles. There is an assumption that the purchased item or service will have consistent quality and on-time delivery with every transaction over time.  Since all the volume is with one supplier, there should be leverage to get the best price.

If all this is true then why do some organizations have strict policies prohibiting single source purchasing?  Generally, it is because one of the fundamentals of professional procurement is competition.  The lack of competition gives rise to many risks.  The two main risks are:  the value for the purchaser may not be optimized, and increased risk of corruption. The buyer and supplier may develop a relationship that is too close to the potential detriment of the purchasing entity.  Single source supply also increases the risk due to a single point of failure such as inability to meet increased demand, or product quality issues.

A subtle but important difference exists between single source and sole source purchasing.  A single source is a source specifically chosen amongst others of equal offering and a sole source is when specific products or services are only available from one supplier. Whether sole source or single source, there are steps that should be taken to minimize the risks:

  • Assure that detailed and complete product or service requirements are defined and included in any purchase agreement.  The requirements must address form, fit, and function.  It should also define delivery time and packaging, including labeling.
  • Periodically inspect and test the product or service to assure continuous compliance with the requirements.
  • Establish clear expectations and maintain overall performance with a supplier score card process (see previous post Do your suppliers make the grade? Do you?)
  • Continuously research and compare competitive offerings.

Sole source evaluation is limited to the compliance of the acquired goods or services to the requirements documented in the purchasing agreement.   One should, however, search at regular intervals to determine whether competitive offerings have entered the marketplace.

Organizations should track and review what they are buying that is sole or single sourced.  Be aware of what falls into these categories, and revisit the justification at least annually to avoid  risks.

Be Sociable, Share!

    One Response to “The Risks of Single Sourcing”

    1. Cary Wheeler Says:

      Well – as a printer I WANT my customer to have single source purchasing – from ME. Nothing frustrates me more than attempting to capture (harvest or farm) an existing account’s entire printing needs, than to be told by the customer, “oh we could never give you all our printing, we need to keep you printers honest through competition.” Honest? You trust me enough to give me some of your work, I’ve never let you down. I stand on my head to get you your projects on time and sometimes under budget – yet you infer that I might be dishonest if you give me more/all your work!!
      I’ve also been told that by customers that they could never put all their eggs in MY basket, because what happens if I close down? They’ll be screwed!
      In the banking industry it’s referred to as “share of wallet” – banks want to increase this wallet share but also find it more difficult than it should be.
      The advantages to single source procurement out weigh the disadvantages I feel, and in theory you’d think more customers would want / desire the less hassle of multiple vendors.
      *Sigh*