4 Reasons why Single Sourcing is Still Good Strategy!

There are a number of current trends and approaches that managers and practitioner of a supply chain may consider to achieve a competitive edge and Single Sourcing is one of them!

There are always for and against arguments to have single source vs multiple source suppliers for a commodity. The current trend is towards adopting single sourcing which leads to mutual dependence.  Single sourcing has changed the character of the traditional supplier manufacturer relationship. Manufacturers are aware that they will be depending more and more on one single supplier. Any failure in maintaining the relationship will create a negative impact on the supply chain performance. Therefore feedback of any problems from either a supplier’s or manufacturer’s perception is important. Most OEM practice single sourcing where a supplier is able to provide the entire volume of demand for strategic commodities to achieve desired cost, quality, delivery and lead time information.

Single Sourcing

Over the years I have seen some companies practiced an adversarial relationship and multi-sourcing approach for their supplies. Multi-sourcing in the Western industrial environment secures supplies for industry in times of any unforeseen disruptions or force majeure situation. Therefore, sometimes, manufacturers do not wish to lose the advantages of multi-sourcing, namely the ability to select the cheapest supplier and to receive innovative ideas from a group of suppliers, rather than just one. However the automotive OEMs have proved that sole sourcing will increase the bargaining power of the supplier.  On the other hand companies choses for Single Sourcing enjoys a  good relationships and mutual trust with their single suppliers, use flexible legal contracts that are very general ‘constitutions’ and can be constantly adjusted and re-negotiated depends on economics. This encourages long term investment from the suppliers as it is important that they continue to perform to stay in the relationship.

The Just in time ( JIT) philosophy has encouraged a lot of Western industries to adopt single source practice. May be they have not been altogether successful, due partly to the different culture, historical issues and industrial practices. However, A long -term relationship with a single supplier of a specific product or group of products results in benefits to both the supplier and the manufacturer.

Here are some benefits for both manufacturers and suppliers in single sourcing

Manufacturers Benefits of Single Sourcing

Administrative efficiency

– There is no need to solicit and review bids from a variety of suppliers.

– There are fewer contracts to negotiate, and these contracts must be re-negotiated less often.

– Blanket purchase orders reduce paperwork.

– There are fewer telephone calls to make and suppliers to visit.

– It is easier to streamline accounting and identification systems.

Lower Inventory cost

– Since the supplier makes frequent deliveries of small lots, the average inventory level is much lower.

– Need for incoming quality inspection can be minimized.

Improved product quality

– The short time span between the delivery of items and their use within the firm means that defective items are discovered quickly.

– The firm can work with the supplier to improve the quality of the supplier’s products.

Access to new technology

– The supplier may be willing to share its technology and contribute to the design of new products.

Supplier Benefits of Single Sourcing

Administrative efficiency

– Large volumes are sold to relatively few customers.

– Paperwork is reduced.

– Lower production costs

– Production planning is easier when customer provides insights into its production plans.

– Production capacity can be better utilised.

– Finished goods inventories can be reduced.

Improved product quality

– Working closely with the customer makes it easier to produce items that meet the customer need.

Access to new technology

– Manufacturer may be willing to share new technology.

Are you using Single Sourcing in your business?  Please do tell me why or why not?

Source: Single sourcing: Manufacturers and suppliers benefit (Noori and Radford, 1995)

25 thoughts on “4 Reasons why Single Sourcing is Still Good Strategy!

  1. Easy to understand.. Love the way you explain the concept..

    I would like to know about Sourcing in Low Cost Countries..

    1. Thanks Chaitanya for comments. I will do some research and post a blog on Best Cost Countries soon. In my opinion Low Cost Countries is ethically sensitive term!

    2. My experience of single sourcing is contrary to your statement. What I have seen is vendor’s complacency as they know the customer has no plan B, making negotiation or improvements in the operation harder than it otherwise should be. A competitive environment is a lot better in my opinion.

    1. Thanks Ameer. Quora is great network to know the answer of difficult questions. I try to share whatever knowledge I have gain by education, research or my practical experience. I have added you in the Newsletter subscription list you get the updated post in your inbox!

      Thanks,
      Dr. Muddassir

  2. Thank you for sharing but i would like if you would share something about the process in procurement e.g biding process and offering a contract to a supplier and what really could be the involvement of a person handling a contract,the process can you help by shedding some light on that subject?

  3. At first, it is always good to know about different perspectives. In my point of view, one source can be an interesting alternative when there is a strong business relationship that allows real and clear profits for both sides. Even so, we must have other approved sources to leave a clear message. When there is no strong business relationship, in my opinion, it is important to have two active sources in order to share the volume, for example: 80/20 or 70/30 radio

  4. No doubt, the mentioned benefits may be attained from single supplier for small scale business but what may happen if:-
    01) Where stands risk theory including calamities etc ?
    02) Business may suffer if any shortage or longer lead time situation arises because of supplier.
    03) There may be many reasons to avoid single supplier as your business may be vulnerable to any sort of stoppage at supplier end.

  5. It’s also good to recognise the difference between a single source, and a sole source. In a single source environment there may be several well placed options, but you elect to choose only one. For a sole source, there only exists one source and “by design” you are married to this source “for better or worse”. I agree with most of the previous comments, that ultimately it is a strategic decision which path to take. Single, sole, dual, multiple sources of supply all contribute when you segment your products and decide what is most important for your business, and what you as a business can afford to administrate. Also remember that a supply mode is not “cast in stone”, and should be reviewed on regular intervals. For example, take a positive challenge “growth” – if you are with a single supplier can they meet your growth plans or would the investment be too great, or would you become a too dominant Customer? Therefore a new Supply strategy could be needed, potentially using dual or multiple supply just to secure on-time deliveries at a consistent quality level (another important set of KPIs).

  6. thank you Dr Muddassir i found this page useful. I am student studying BCOMs in Purchasing And Supply. May you kindly help me about, The role of power in relation to a single sourcing strategy and negotiation strategies that can be used to ensure collaboration..?

  7. It is a good article. Thanks for sharing. In supply chain perspective. I agree one point in the comments that have two active source suppliers and set the volume to 80/20 or 70/30 radio. That will avoid the supply shortage from supplier side. For example, this year our supplier had capacity and material constraint and we use the single sourcing strategy, then we had many backlog from supplier side and of course leads to many backorders. we really suffer a lot from this shortage.

  8. Thank you Dr Muddasir for this article as well as all your other educative articles. I totally agree with you that single sourcing will enhance good human relationships and mutal trust in every business but
    in the transport industry this single sourcing will have a lot of short comings.
    for instance in Africa this industry isn’t doted with suppliers that can boost availabilty of all transport accessories such as trucks ,buses and planes and even if they are , at what cost will it be for the small entities or enterprises.

  9. You use the term “commodities” with respect to single sourcing. To me, a commodity is something that has multiple sources, standard specifications and ease of switching suppliers. An example is computer memory chips. IMHO, commodities should be multiple sourced so you don’t give up leverage, and maintain relationships because the leading supplier for today may not be the leading supplier for the next generation of the product. Perhaps you have a different definition of commodity.

    A typical auto industry buy is a high level assembly, like a seat or a dashboard. Those make sense to single source for the life of a project.

    Forecasting for multiple source can be easily done by contracting for a share of business and sharing forecasts by multiplying the total projected demand by each supplier’s share of business.

  10. Dear Dr, I found you over FB group and landed on your website. Can you please advise the resources for Supply Chain for Trading Companies. How can supply Chain strategies can be beneficial for Trading companies ( Spot Trading vs. Stock based Trading ) ? Thank you.

  11. Thanks Dr. Over my 5 year career, I personally hv found single sourcing to speed up procurement processes. The main challenge I faced is convincing our stakeholders like our finance and audit coumterparts who think we always must use multiple sources. To them procurement is equal to cost cutting always and nothing else. They don’t understand stand the potential value that we cn add in form of creating long lasting and trustworthy relationships courtesy of single sourcing.

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