The Coronavirus Pandemic has quickly and severely disrupted Supply Chains of every kind around the world. Lockdowns have resulted in the temporary closure of Manufacturing and Distribution facilities and discontinuation of Logistics and transportation modes.
Additionally dramatically higher demand for household supplies (eg. toilet paper) and medical personal protective equipment have resulted in stockouts and shortages.
In many cases the use of single sourcing, or sole sourcing, Procurement strategies has limited the ability for Supply Chains to access alternate sources of supply and more rapidly support higher than normal demand levels.
As we progress through and past the pandemic, is it time for Procurement to adopt parallel Supply Chain strategies, such as dual sourcing, and limit or abandon single sourcing and sole sourcing?
What is Single Sourcing or Sole Sourcing?
For clarity let’s define what these sourcing terms mean.
Single sourcing is the result of a very conscious decision usually made by the Procurement or Purchasing department. Only one supplier is awarded business for a particular component, part or material even though there are other suppliers that can provide that same supply.
Single source decisions are usually the result of a quotation or bidding process after which all candidate suppliers are narrowed down to one. Sourcing decision criteria will most likely consider unit pricing, operating terms and conditions, and perhaps items such as quality or delivery capabilities. In any case only one supplier is chosen from a field of potential suppliers.
Sole sourcing is similar in that there is only one supplier for a particular good or service, but that is because that supplier is the only supplier that provides that good or service. No other companies provide that component or material.
Sole source suppliers provide unique materials that can not be provided by any one else. This may be due to intellectual property, technology, design tolerances and specifications, expertise, or branding. Whatever the reason only one source is considered capable of providing those materials or services and as such that supplier is the only source of supply.
What are the Pros and Cons of Single Sourcing or Sole Sourcing?
There are both advantages and disadvantages of these sourcing models, of having all your eggs in one basket as it were.
In the case of single sourcing a competitive bidding process is usually conducted before a business aware. This theoretically allows a Procurement team to derive the best possible outcome in terms of pricing or other terms that they seek from the winning supplier. Further the Procurement team only needs to deal with one supplier in managing that particular supply line.
Overt competition in the bidding arena will separate out those who want the business from those who can’t compete, regardless of the award criteria. The result is dependent on the quality of the bidding process and the extent of the supplier qualification work that went on beforehand. For even though the winning supplier may have had the best price, for instance, only time will prove whether they are able to deliver as promised and meet the original expectations established in the aware.
Once the business award has been completed however the leverage of making that award is gone, at least for the duration of that award or contract, notwithstanding any failures to perform and deliver.
Fundamentally a single source represents just that, only ONE source of supply. The ability of the single source supplier to support demand fluctuations, adjust capacity to needs, mitigate quality or production issues, and survive disasters are all important issues. If that supplier is disrupted your supply chain can come to a halt quickly.
Further making a single source business award may turn off alternate suppliers from wanting to do business with you in the future. They may not believe in the integrity of the bidding process or they may allocate all of their capacity elsewhere. Their availability to provide you with an alternate source in the future, if so required, can not be assumed as assured.
A sole sourcing model provides a similar dilemma. You get something of current value but in exchange you are faced with the risk of having only one source.
Access to technology or unique capabilities from a sole sourced supplier may provide market place advantages or a competitive edge. In most cases sole sourced suppliers can also offer their products or services to others but you can only buy from them as you have no other alternatives.
The sole source supplier represents a critical, single point of failure and a high risk that must be considered. As the Coronavirus pandemic has proven no one and no company is immune from the virus and any Supply Chain can be disrupted. If your sole source supplier has any kind of issue with quality, delivery, or other capabilities then you are completely at their mercy in terms of recovery and restoration of supply.
Is Single Sourcing or Sole Sourcing a Dead Strategy?
One of the outcomes of Supply Chain disruption during the Coronavirus pandemic has been action to activate the Defense Production Act in the U.S., for instance. Simply put the Defense Production Act allows the government to force manufacturers to start producing other goods which they would not normally provide.
Strategic National Stockpiles of critical medical supplies have been depleted and the need for greater supply has never been more important. Automotive manufacturers by example are looking to start making ventilators. And countries are highly concerned about the strategic sourcing of rare earth elements.
Fundamentally the level of global disruption has been so great that any single source or sole source practices have resulted in loss of or reduction in supply in virtually every industry.
Having multiple sources basically enables any Supply Chain team to award business anywhere instantly and simultaneously to ensure a more robust capability to maintain supply lines. Anyone who had a multiple sourcing strategy in place would be better able to withstand any disasters in whatever form they may be.
Multiple sourcing models include a high consideration for risk mitigation and the need to assure continuity of supply.
There can be disadvantages with having multiple sources. Split business awards may result in suboptimal pricing or terms and conditions. Quality and delivery may be inconsistent. More resource may be required to manage more suppliers.
And in the case of sole source suppliers there may be a loss of technological advantage or competitive differentiation from considering other sources or substitutes. A product or service in its current form may be completely dependent on that sole source supplier for which there is no viable alternative anyways.
The personal, business, and economic impacts of Supply Chain disruptions are very apparent to anyone as we go through the Coronavirus pandemic. While no strategy would have eliminated these impacts it is reasonable to consider that multiple sourcing strategies, as opposed to single sourcing or sole sourcing, would have mitigated some of that disruption and impact.
Future Procurement sourcing strategies must place more emphasis on supply line risk mitigation. There may be higher short term costs or greater demand on resources. An A.I. based costing software solution processes all current purchase prices and identifies deviations from estimates, making it easier to identify savings opportunities , including negotiations with suppliers.
But in the long run the ability to ensure continuity of supply with less impact on jobs, customers, the economy, and our personal lives will be well worth that cost.