Purchasing Single/Sole Source Goods Effectively
Elaine Whittington, C.P.M., A.P.P., CPCM – Educator
G & E Enterprises
91st Annual International Supply Management Conference, May 2006
Abstract: This paper will discuss the differences, advantages, and disadvantages when purchasing from single/sole source suppliers. It will look at the situations which require such strategy and discuss the importance of careful source selection. Some contractual items which may make this type of purchasing tactic effective will be covered.
Objectives: The objectives are to present information to assist the supply manager in the following aspects of dealing with single/sole source suppliers:
_ Major Advantages
_ How to Deal With Disadvantages
_ Source Selection Necessities
_ Writing an Effective Contract
There is a major difference between “single” and “sole” source procurement. Single sourcing is defined as “the practice of using one source among others in a competitive marketplace which, for justifiable reason, is found to be most advantageous for the purpose of fulfilling a given purchasing need.”1 A single source is not necessarily the only place which can supply a particular item, therefore, when talking about single source one must be aware that other sources can and do exist. The key word here is “single” not “sole”. On the other hand a “sole” source is truly “the only place that a particular item can be obtained”. It is “the only game in town.” “Single/sole source” procurement can be a buyer’s nightmare. There are some advantages which should be noted:
1. Quality can be more consistent.
2. The supply manager need only approve and manage one supplier.
3. The supply manager need only focus on one supplier for delivery and service.
4. There might be better opportunities for design improvement.
5. Purchase quantities may be larger.
6. One purchase may provide more efficient shipping and lower costs.
7. Single purchases may result in less accounting efforts.
The supply manager must be aware of some critical disadvantages:
1. A catastrophic event will stop production and shipments.
2. The supplier may become complacent.
3. Risks of financial problems, price increase demands, inability to meet shipment requirements and possible mergers or acquisition can cause different management focus 1 ISM – Glossary of Terms
Single/sole source purchasing can be appropriate or necessary when the following situations present themselves:
_ The supplier has a patent on the device or item.
_ The basic assembly demands tight tolerances and many parts must work together. _ The supplier has a good deal of previous experience in the manufacturing of a particular device.
_ Important time constraints exist.
_ The supplier is willing to bear some of the development costs.
_ The supplier’s quality is better than any of the competitors.
Sole source in particular can be caused by many unique situations, such as an engineering design which restricts the use of an item noting that it is the only one which will function or fit as required by the overall design. As noted, it might be an item on which the supplier has a patent and so he is the only source. Sole source could also be attributed to a problem with raw material where a particular supplier has the corner on the market. Again, when talking about sole source it must be noted that no other sources exist or sourcing is completely restricted.
It is important to take steps to reduce risk as much as possible when purchasing from single/sole source suppliers. Strangely one of the first and important things to consider is to investigate the market thoroughly and assure that the chosen supplier is indeed the best supplier. It is important to encourage competition which will create a healthy hedge in the marketplace for you. If possible you might even wish to pre-qualify a second supplier. This makes sense even if it requires a small investment on your part.