What Is a Sole Source in Supply Chain Risk Management?
Sole sourcing is a common strategy in supply chain management. It entails using a single source to supply goods. While this may sound simple, the pandemic era has made its challenges clear. Now, it’s in a business’s best interests to address the role of a sole source in supply chain risk management.
A sole or single source may present key benefits when managing a supply chain. It can also be a source of many risks. Supply chain managers need the skills and understanding to mitigate these risks — and maximize rewards — for greater success in a post-COVID economy.
What Is a Single-source Supplier?
A purchasing and procurement team decides to obtain a specific part, material, or item through only one supplier. Maybe other suppliers could provide the same, but single-sourcing means using only one. Typically, the cost is the determining factor in such a decision.
To procure materials from only a single supplier, businesses need incentives. That’s why this process usually starts with quotes and bids. The cheapest source with the highest quality and operating terms that work for the supply chain in question wins out to create a loyal and efficient relationship.
Take, for example, Toshiba’s use of Asyst Technologies Inc. as its only supplier of 300mm fab. The exclusivity of this production and supply collaboration allows both companies to focus on the quality of this specific material. Working closely together, both companies can optimize the product while creating valuable long-term relationships.
Sole Sourcing vs. Single Sourcing
While these terms might seem synonymous, the reality is that a sole source is distinct from a single source in one specific way.
With a single source, supply chain managers select an individual supplier out of a selection of bids. They evaluate all options on the market and choose one exclusive source. Should things not work out with the chosen supplier, there are other places to turn with a single-source approach.
On the other hand, a sole source is a business’s only option for a particular part or product. This means that the supplier is the only one capable of providing that item, at least without substantial cost and operational barriers. Here are some situations when sole sourcing becomes necessary:
- Suppliers own a particular patent, design, or formulae.
- No other vendors can supply the product.
- Esoteric systems and software make a switch too expensive.
- Manufacturers are deeply integrated with a supply chain.
- Industry regulations limit supplier options.
Where risk management is concerned, a sole source presents a much greater threat than a single source. That’s because supply chain managers have nowhere else to feasibly turn if their sole supplier goes down.
However, there are advantages to sole sourcing that can mitigate the high levels of risk. Supply chain managers are best served by a comprehensive view of the situation, its risks, and its rewards.
Advantages of Sole Sourcing in Supply Chain Management
From the outside, a sole source may appear to be the worst nightmare of any supply chain risk management team. After all, COVID-19 showed the world how quickly suppliers can experience unpredictable challenges that impact production. Effective risk management, then, requires analyzing sole sources for their benefits and risks.
For example, a business might be able to get away from sole sourcing through innovation, research, and development. However, the associated costs may be riskier than sticking with the sole supplier. The following are benefits that mitigate both costs and risks for supply chains that use a sole source.
Reduced Waiting Time for Awarding Contracts
Vendor contracts dominate 90% or more of annual revenues for a majority of companies. These costs include the time and labor associated with evaluating bids, creating and implementing Key Performance Indicators (KPIs), and managing the vendor contract.
With a sole source, the time and labor associated with awarding contracts go down. Supply chain managers already know plenty of the details, allowing them to focus on creating contracts that maximize the potential of the relationship.
Lower Administration and Procurement Costs
Similarly, the singular nature of the supply source makes it easy to cut administration and procurement costs. That’s because managers don’t have to spend the effort seeking out and comparing bids. In addition, they can leverage other lower-cost elements of an embedded business relationship to generate the most value out of their sole-source partner.
Since these relationships are often mutually dependent, supply chain managers have some ability to negotiate specific agreements that keep costs reasonable. With 79% of Chief Procurement Officers (CPOs) focused on cutting procurement expenses, a sole source can be a competitive advantage as much as it is a risk.
Improved Delivery of Services and Products
Additionally, the close nature of a sole-source vendor means supply chains can (and should) expect improved delivery of services and products. As an exclusive provider, vendors should know their partners and their needs. Vendors are depended on to a greater degree in this case, so a greater level of integration and transparency is a must.
With a more deeply integrated role in the supply chain, a sole-source supplier is as much a partner as they are a vendor. Supply chain risks can be managed more effectively and mutually with this level of intimacy. However, there are trade-offs.
Disadvantages of Sole Sourcing in Supply Chain Management
A sole source carries inherent disadvantages.
Supply chain risk management depends on understanding and mitigating these risks. Common disadvantages of sole sourcing include the following.
Too Much Dependency Between the Supplier and Buyer
The most prominent risk factor for any supply chain using a sole-source supplier is, of course, the dependency between the supplier and the buyer. If a buyer has nowhere else to turn, this creates a problem any time the supplier’s interests don’t align with the buyer or they encounter production challenges.
To mitigate the riskiness of such a situation, it helps to have a sole vendor that relies on the buyer’s business as much as the buyer relies on them. Otherwise, the vendor may inflate costs or fail to prioritize the buyer’s needs.
Lack of Industry Competition
Another impactful disadvantage of a sole-source supplier is the lack of industry competition. Competition can lead to higher-quality products and services. With only one supplier offering these products, the need to innovate to stay competitive is gone.
Lack of competition means that products may be slow to improve. This might not be a problem for vendors of vintage car parts or similar industries, but in an evolving tech-driven market, businesses have to prioritize innovation.
Effective supply chain risk management hinges on a business’s ability to address and balance these advantages and disadvantages. Fortunately, supply chain managers can cultivate the skills they need to succeed.
Managing an Effective Supply Chain
There are many skills involved with effective supply chain risk management. Often, these skills revolve around business administration as well as the technical know-how to elevate an operation.
A graduate program can be an instrumental step in acquiring what you need. For example, an MBA in business analytics offers individuals expertise in managing spreadsheets and software for data mining, exploration, structuring, and visualization. From here, assessing sole and single-source risks is a matter of using the tools and knowledge you’ve already accumulated.
Additionally, making the most of a sole source requires a comprehensive education in topics like the following:
- Business Strategy;
A general MBA degree offers many more skills applicable to supply chain risk management. An MBA and similar programs will give you the expertise needed to effectively manage supply chain risks, no matter how many sources supply your business.
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