Single vs. Multiple Sourcing: Choose Smarter

Thoughtful sourcing management contributes to the competitive advantage.

Two Japanese Fighters

The competitive advantage isn't just the virtue of the firm's internal capabilities. Suppliers contribute to it with quality, timeliness, cost-efficiency, and innovation.

Therefore, procurement is one of the custodians of the competitive advantage, as it selects appropriate suppliers and moderates relationships with them to obtain the most value.

There's still a strong belief that competition is the mandatory attribute of procurement in many companies. Сrowd-fighting for new orders looks pleasant to the executives and instills trust in achieving the best commercial conditions. 

Yet, selecting the sourcing process - single or multiple - is a powerful tool to manage prices, improve relations, and mitigate risks. 

Single vs. multiple sourcing: advantages and disadvantages 

Putting aside scenarios of hidden or objective monopolism (unique offering, state-regulated services, etc.,) single sourcing attracts mostly negative vibes due to:
  • greater dependency on a supplier,
  • increased vulnerability of supplies.
However, single sourcing also means 
  • closer ties between contracting parties, 
  • single center of responsibility for the end-product quality or project results,
  • the better appetite of a supplier to invest in the relationship-specific assets,
  • economies of scale due to a more effective production process based on longer relationships and more refined knowledge of customer's requirements,
  • lower transaction costs for the supplier selection and contracting,
  • lower cost of inventories.
Therefore, the pros and contras of each version of a procurement process must be evaluated carefully.

How to select the sourcing process

We only reviewed a few research papers to prove that the single source could be the most viable scenario under certain circumstances.

Sourcing process selection by supplier reliability

This research paper suggests considering a single-source option when the reliability (or SLA) of the 1st supplier is 90% or better. 

Logically, the cost difference between suppliers isn't the only decision driver. The supply reliability affects the stock holding, stock-out, and ordering costs.

Therefore, the single-source option becomes economically viable once that supplier delivers timely and consistently.  

Sourcing process selection by quality investments

Another logical consideration of a single source is provided in this research. 

Once a manufacturer wants to invest in the quality development of its suppliers, a cooperating strategy with a single supplier becomes dominant.

This conclusion resonates with the earlier explained transaction cost economics theory. Such relationship-specific investments diminish the threat of supplier opportunism. 

Sourcing process selection by the type of task and project revenue 

The following research proposed another thoughtful way to select the sourcing mode.

It introduced two critical decision attributes:
  1. Type of task - modular or integrative.
  2. Alignment between project revenue and supplier performance.
Basically, this research suggests that whenever the project task is integrative (one enormous task as opposed to a series of interconnected smaller ones,) project revenue is verifiable, and supplier performance is measurable - you may opt for a single source. 

The proposed contract form for single-source projects will be the "cost + premium," which relates to the supplier performance and achievement of projected revenues.

Of course, the scope of research is much more complex, and the results are way more diverse. Still, it calls for a need to be smarter than "more suppliers means better savings."

This post doesn't advocate for a single source; instead, it recommends avoiding boiler-plate governance rules. 

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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.


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