Exploring Supply Chain Risk: Sole Sourcing

A recent study by the supply chain faculty at the University of Tennessee, Managing Risk in the Global Supply Chain, highlights one key area supply chain risk many procurement organizations do not often consider as primary supply risk considerations: sole sourcing.

Sole sourcing involves working with a single supplier for a given SKU, item or service. The University of Tennessee study found that “38% of suppliers are sole sourced. But the spread is very broad. At just one standard deviation, the range for sole sourcing among the firms surveyed was 13% to 63%. It can safely be said that many firms take on the risk of sole sourcing with a relatively large number of their suppliers.”

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Sole sourcing goes against the purchasing philosophy of many manufacturers, such as Japanese automotive OEMs, which believe in cultivating relationships with different suppliers to keep their “lead” vendors in a split of business situation (e.g., 80/10/10) on their toes at all time. Yet this practice is a significant driver of supply chain risk given the switching costs of not just increasing production at an existing supplier, but ramping an entirely new one.

Related to sole sourcing (from a risk perspective) is working with different suppliers that have facilities/plants that are located in a single region (which is common in certain Asian supply communities). Yet at least in this situation a site-specific incident (e.g., fire) will not take down an entire supply chain.

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First Voice

  1. Omar Khan:

    Sole sourcing and single sourcing have some benefits in terms of price locks and lower prices. However, the risks posed by these sourcing strategies to the supply chain far outweigh the benefits of lower pricing. In fact, single sourcing; where a customer has the option to use other suppliers but chooses to stick with one (single) source is not as risky as having a sole source situation. Sole sourcing is extremely restrictive situation where a customer does not have the option to use another supplier due to “sole source supplier’s Intellectual Property rights, specification requirements or exclusive technological capability in the market place. As the author has rightly pointed out, both single and sole sourcing strategies go against the core philosophies of purchasing / procurement discipline. From my professional perspective of commodity management in the semiconductor industry, business split of 50/30/20 in multi-million dollar commodities have successfully kept the supply base competitive and risk factor at a relatively low level. Same strategy of business split among key suppliers can be scaled down & deployed to mitigate the risk of sole sourcing at small to medium size companies or any business for that matter.

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