Single Source Procurement
A company chooses one supplier to provide specified goods and/or services, even though other suppliers are available.
Single Source Procurement Details
Most companies rely on external suppliers for at least some of the goods and services they use in their production processes or services. Very few businesses are independent. A car manufacturer uses external suppliers for components. A restaurant uses external suppliers for its vegetables. Some businesses may choose to use just one supplier for a particular item it needs, even when other producers could supply that item.
Using a single source to supply a specific product or service offers various advantages:
- Relationship: The producer and supplier know each other and solve any problems through personal contact.
- Knowledge: The supplier knows exactly what the producer needs.
- Consistency: The producer knows that the supplier will provide items that meet its quality requirements.
- Control: Using a single supplier means that the producer can easily monitor inventory levels and adjust orders according to demand.
- Price: The producer may be able to negotiate a lower price. The supplier knows that other companies can supply the items that it produces.
- Simplicity: A company will find that ordering, invoicing, and general administration are easier when it deals with just one supplier.
Although there are advantages to single-source procurement, there are some drawbacks. Chief amongst these is over-reliance.
Single Source Procurement Example
Northwild Warehousing Services offers storage and distribution to a variety of businesses in Denver, Colorado. Some of its clients require regular transport of their stored goods to outlets all over the United States. These shipments may be of perishable items. Northwild enjoys a good reputation, its business is growing, and several clients have stayed with them for years. However, Northwild does not have a fleet of trucks; it entrusts all its transport needs to Bailot Trucking.
Bailot Trucking has worked with Northwild for fifteen years and has expanded with them. Bailot and Northwild have a close relationship, and Bailot now works exclusively for Northwild. The owner of Bailot is a little worried that his company's dependence on one client leaves it vulnerable to any change in Northwild's policy. Meanwhile, Northwild is doing more and more business on behalf of a large national chain of supermarkets.
The supermarket chain demands and receives an efficient service from Northwild. These demands are subsequently passed on to Bailot, which is finding it difficult to keep up. Bailot will have to buy more refrigerated trucks and employ more staff to meet Northwild's needs. Bailot is worried that it will have to borrow a considerable sum of money from its bank to cover the new costs that further expansion entails. Finally, the owner of Bailot decides that his best option is to sell his business to Northwild.
Single vs. Sole Source Procurement
Single source procurement means that a business chooses one supplier to furnish the items it needs, but other suppliers are available. Sole source procurement means that there is only one supplier that produces the item required. There is no other alternative.