The Risks of Single Sourcing

Introduction

 Ashley defines single sourcing as the process of outsourcing a responsibility for a service or process to one entity, which may be a company or individual.[1] For example, if an organization decides to outsource its Information Technology infrastructure and software development to only Oracle. This is contrasted with multiple sourcing, which refers to the selection of more than one entity to provide related services or processes. For instance, if a company selects Oracle to host its cloud or web applications and IBM to maintain its servers and databases, it is multi-sourcing. There is a growing tendency to outsource from a single or few suppliers. Many organizations aim to have only one supplier or vendor for each component, product or business functional area. Others have found that reducing the number of vendors or suppliers saves some considerable time and money, gives them greater control, avoids duplication and improves their business relationship with the suppliers. However, single sourcing can also make organizations more vulnerable to an interruption of supplies or services. According to a research carried out by the Purchasing Procurement Center (PPC), 40 percent of businesses rely on a single supplier while the rest use dual or multiple sourcing.[2] This paper discusses the risk involved in using a single sourcing model in procurement and operations management.

The risks of single sourcing

In single sourcing, an organization no longer sees bids from competitors, so there is a risk of higher prices or cost of procurement. Some entities use target pricing, where the supplier is requested to supply a product or raw materials at a price determined by the customer. In certain scenarios, the supplying firm may be asked to quote as stable price for 12 months. As a result, as much as the modern procurement techniques or practices outline the benefits of restricting the number of suppliers or of sourcing raw materials from cheap and distant sources, a supply chain risk manager should strive to avoid overreliance on a single vendor or service provider. It is advisable to keep more than one supplier or service provider for the products or services with fluctuating prices, for example, products manufactured from commodities. Some companies are shying away from single sourcing[3]. For example, at Kodak, supply chain managers receive bonuses tied to their performance in achieving supplier diversity targets. According to PPC, these targets are defined by regions and commodity.[4] According to the CIO of General Motors, Ralph Szgenda, it is important to be able to shift suppliers quickly. This was pointed to the risk of failing to deliver the right service or product[5]. In this dimension, multiple or dual sourcing would prevent an organization from the tendency of single providers to create proprietary systems that can lock in a company. Total reliance on a provider may affect operations in the event of a service provider setback.

Additionally, single sourcing also presents a risk to downstream businesses.[6] For example, in the pharmaceutical industry, if there is a global shortage of an ingredient that its production was outsourced, the industry has to adjust the specifications and drug prices accordingly. This particular increase in price may be due to extensive research and development investments aimed at manufacturing alternatives or upgrading technology within the industry. In addition, single sourcing increases the risk of single point failure or breakdown, such as product or service issues and inability to meet growing demand. For example, if a bank hosts its mobile banking services to a cloud computing company and the service goes down, the bank might lose some customers due to poor customer experience. Single sourcing also risks a company’s competitive advantage given that it does not have a framework to make comparisons. Lack of competition results in increased risk of the purchaser service not being optimized and increased cases of corruption.

Moreover, a company that is conservative about single sourcing risks losing potential vendors or service providers in the sense that other providers may lose interest in competing for a tender if they project that the single sourcing situation is likely to persist. The outsourcing company may also risk losing its employees lured into corrupt dealings to give some providers privileges in procurement or tendering processes. There is a critical risk if the sole source merges or is acquired by an industry competitor or has a financial problem[7]. This may lead to rigorous restructuring of the single sourcing contract if such consequences were not outlined in the initial contract. Lastly, during tight supply schedules, a company may be disadvantaged for not being able to request other suppliers to accept orders.

Conclusion

There are circumstances when an organization is faced with a single source procurement of a product or service because there is only one supplier. However, most often there is more than one service or product provider available, leaving the outsourcing entity with choices to make. Organizations have to weigh the advantages, disadvantages or risks involved to implement single sourcing. In the current global economy, organizations should not limit their business plans or operations to domestic markets. In fact, this is an important aspect of trade that should be considered when choosing a sourcing model. It is also important to do some research on pricing and the availability of the targeted service or product. The other aspect that should be considered is the performance of the incumbent vendor or service provider for at least one financial year. Companies should also utilize internal and external statistical data to project how the demand is likely to shape in the future in reference to its sales and marketing plan.  Once the correct information has been gathered, strategic managers would be in a position to choose the right sourcing model for their situation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

Ashley, Ed. Outsourcing for Dummies. Hoboken, N.J.: Wiley Pub, 2008.

PPC. Single Source Procurement. 2013. http://www.purchasing-procurement-center.com/single-source-procurement.html (accessed May 9, 2013).

Ritchie, Bob, and George A Zsidisin. Supply chain risk: A handbook of Assessment, Management, and Performance. New York: NY Springer US, 2010.