I am jealous to those who never had to deal with true sole suppliers. I think IT buyers will understand me best. It is just not that much fun.
- if you could be buying from quite a few suppliers on the market, but choose to stick with one supplier (leaner supply chain, eliminated duplicating logistics and management, administration costs) – you have a single source situation.
- If you cannot buy from any other supplier – you have a sole supplier situation.
What are the real-life examples?
There are many office cleaning services providers out there in the market. However, for a list of very good reasons, you choose to outsource it to one service provider. That would be single sourcing. Now… imagine five different suppliers working on your ERP system creation and implementation at the same time, doing the same job for the same part of scope. Not fun. Or imagine that your supplier came up with exactly the product you need for your manufacturing process and… patented it… and keeps on asking price increases on every logical and illogical opportunity. Even less fun.
How does it happen?
For single sourcing the option is deliberate choice. There are many advantages to it:
- You keep the competition, because the supplier can be easily replaced. Negotiation leverage is at its maximum level like this.
- At the same time, you spend less time for supplier management and supply chain administration.
- You have consistent quality of items or services delivered. Or, if not, deal with it in one go.
- You eliminate all non value adding activities (short example mentioned here).
- The supplier will be more willing to work with you on various cost reduction/ services improvement initiatives.
- The threat of losing business in the future will be a big motivator to not overcharge you.
For a sole supplier situation to form, there can be various reasons. Some of them are more to do with perception and resistance to change while others are truly sole supplier situations. I separate them into three categories. Please see explanations and lists below.
- Category I: true sole sourcing situations, where the company might be depending on one supplier without any escape routes.
- Market monopoly (central heating in some locations, governmental services and similar).
- Various patents: design, chemical formulae.
- Lack of supply.
- Category II: high exit barrier single source situations – there are situations when due to various barriers (most often – financial: costs of switch) competitive situations turn into sole supply situations.
- Equipment investment (when supplier provides plastic granules storage and supply systems; cleaning chemicals’ supplier provides funds for equipment).
- Digital solutions – and the switching costs, related to them. Similar with the above. You might have had big negotiation leverage during initial buying process, but once initial contract period is over you catch yourself in a huge hangover. You find yourself depending on a source which, technically, is not sole, but switching costs are so painful, that it gradually turns into one way street of constantly increasing maintenance bills.
- Manufacturing supply chain integrations. Some happen naturally (historically): imagine few factories being owned by one company, where one of them is internal supplier of work-in-progress items for another one. And some time along the way the first one is sold to other owners and becomes external supplier. While their manufacturing lines are tide-in with each other (line technical parameters, product and work-in-progress technical specifications). Similar integration can happen based on business’ decision to become partners with a specific supplier.
- Industry regulations (or agreements). For instance – to be able to insure cash in a safe, insurance company might require specific quality certificate from a very specific certification organization. In this case, you cannot negotiate much and are being put into situation where you are given only one option.
- Category III: pseudo sole sourcing situations. A lot of times, business situation evaluation is more about perception and will, rather than pure statement. Identifying these would bring biggest benefits.
- Business users’ preferences. Surprisingly enough, there are quite a few categories of spend, industries and companies, where business users are permitted to have preferences. Next time you will be complaining about big number of resistant stakeholders (while you think about 10… fine – 50 people), remember your colleagues who work with personal health and safety products and serve factories with thousands of people that they must please. And yes, over the time, people tend to give preferences to brand name products. Implementing any change might be challenging.
- Historical heritage. “We have always been doing it this way” – or buying from this supplier. And only this supplier.
- Business’ requirements list. Those lists, that make one or the other supplier unique. Technical specifications, prepared by engineers. Delivery requirements, set by business users. Packaging requirements, defined by operations or logistics or marketing.
Can you do anything about it? How?
Definitely – yes. Depending on what you are dealing with and which stage in the process you are in:
- Firstly, if you can avoid buying – you should.
- Be involved in a process as early as possible – to prevent from any pitfalls.
- Make it yourself – if it is an option. You can also find a provider who has similar services or products and convince them to adjust their offering to your requirements. Integrate vertically by buying your supplier and making them your internal provider.
- If you are on a tender (or category strategy review) to buy a product / service:
- Check full life cycle, related to the product and / or service. Analyse what kind of additional costs will be related to object you are purchasing.
- Study alternative sources (make or buy decision, again: even if you choose to buy, when the time comes to create negotiation leverage, you will have your homework half-ready).
- Choose the right way of buying. If it makes sense – maybe you can buy machines and servicing / maintenance separately? Or the other way around – bundle, if that makes sense.
- Prepare a good contract in advance and communicate it upfront – with built-in price review mechanisms and no-penalty exit.
- Invest time in developing full SLA – and following in through to the end of the relationship.
- Share the information (technical, legal, commercial) early in the process with all suppliers; cross-validate with specialists, 3rd party service providers.
- Analyse proposals with the purpose to identify “unique” solutions.
- Analyse the supplier’s business needs and decision drivers:
- time of the year (when does their financial year finish? Is there a reason to believe that tendering on a specific time frame might give you better or worse conditions – like buying grain just after new harvest data is clear and not based on assumptions; like negotiating software giants closer to their financial year end, when they are likely to be more aggressive with pricing).
- geographical aspect: if you are negotiating with huge multi-country covering supplier, perform market test of their pricing policy in different countries. You might be surprised, that your branch, located somewhere further away from central function would get a better group deal purely because of the location.
- sales strategy: are they more aggressive with the pricing of new solutions / new technology? Are they interested in growth? Market entry? Stopping their competitor entry? Can you invite someone new, who is not yet in the market? Does the size of the contract matter?
- do not forget to negotiate small value adding add-ons and other benefits to the contract.
- “sell” positive references, feedback and referrals.
- reduce their risks and become a better customer (implementing electronic ordering and invoicing tools, consolidating POs).
- threatening with an alternative supplier – or bringing one in.
- juggling the timing of signing contract.
- Consider change to business strategy – move the location of your HQ, give up of markets or products.
- Invest in in-house R&D, work with laboratories and universities.
- Re-evaluate short term switching costs and compare them against long term business losses if you decide (once again) not to change anything.
- Educate business users. Re-think and challenge old ways of working. Eliminate all pseudo-sole suppliers.
Should you do it at all?
That is the question, too. The saying goes “nothing personal, just business”. Procurement should also be business oriented and invest its resources where they matter. Should you start any project? Depends. If this is something that you must do routinely (review category or contract) anyway – you might just consider how much time and effort to invest. And similarly, if the prize, that you are after, is big enough – it means it is worth spending time with it.
Based on the situation your business is in, you should perform opportunity analysis and evaluate your expectations. It is not only about the size of the spend. With sole suppliers, there is another level of complexity to be evaluated – the nature of the business situation. Yes, you can do this for sole supplier situations, too. Per the categories mentioned in the article above, approximate ratio of effort / success can be shown as per graph below. Required effort is a relative number – it can vary in units of measurement (days / weeks / months / people involved)
That is one part of the equation – it performs a sense check from Procurement’s perspective: you have size of the spend, adjusted by situation complexity. Another big part to the projects like this is implementation. In many cases, it can (and will) end up in a change project. If you want Procurement’s credibility not to suffer, you must make sure, that savings promised and savings landed (or benefits) are as close as possible. So, if you decided, that procurement is interested to pursue an improvement project, perform another quick sense check: change equation will help you (Beckhard-Harris’ model).
What this says is if the dissatisfaction with sole supplier situation is big enough (bigger than the resistance), if the benefits anticipated also play a role in the game; if you have a plan how to act (discussed above) – you increase the chances of success and delivering benefits to the business. At the same time, it suggests what you can do if any side of the equation is not favourable: increase internal dissatisfaction among key stakeholders (clearly communicate risks and losses of the situation to finance people), reduce resistance to the project (get the buy-in from engineering, technology, sales and other departments).
Thank you for reading! Would be happy to hear from you and learn from your experiences on this matter.