The Risks of Single Sourcing
By Richard Losch 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.