When Sole-Sourcing becomes Supplier Complacency

     Sole-sourcing is an often contested supply chain strategy.  The benefits of utilizing one supplier are clear - consolidating all spend volume under a sole source allows you to use leverage to negotiate lower pricing, competitive terms, and build a strong relationship.  The downside is equally as apparent.  One source is risky, and should that supplier experience an interruption in business continuity it could halt production and hurt your bottom line.  Recommended mitigation strategies to this risk are the prequalification of alternate suppliers and flexibility in reacting to supply chain interruptions.  Implementing these precautions

seems to make the decision black and white, sole-sourcing will ultimately improve efficiency, promote quality consistency, and improve your bottom line.

     Unfortunately, nothing is this simple, and there is a large gray area of sole-sourcing pros and cons that is often overlooked.  This is a case of a single supplier relationship turning into complacency, and how chasing the “low hanging fruit” of immediate cost savings by shifting process ownership to a more efficient party can often lead to a long term loss of value.

     Consider a company, Clean Co., which produces a home cleaning spray that is sold in custom printed plastic containers.  For years this company utilized 20+ suppliers of containers, however in an effort to build a more efficient supply chain they cut down to three.  Amongst these final three suppliers was a large company, Plastic Giant, whose capabilities seemed to far outshine the other two.  Clean Co. decides it is in their best interest to move all volume to Plastic Giant, and in return they receive lower prices, vendor managed inventory programs, and short lead times.  The benefits take effect immediately and both sides are content.  As the relationship strengthens, Plastic Giant becomes more and more familiar with Clean Co.’s needs and eventually the boundaries between the two businesses begin to blur.  Clean Co. is no longer as involved in their own process and this is problematic on many fronts.

     The first is that the more trust that is built, the less ownership Clean Co. needs to take of their processes and specifications.  It may be easier and more efficient to allow Plastic Giant to manage the documentation and make efficiency decisions surrounding product design, material, and quality.  Should the need for a change in supplier arise, Clean Co. will have a much harder time transferring their needs as they are now segmented between departments with the complete design coming together under Plastic Giant’s coordination.

     A second issue is that Plastic Giant loses incentive to innovate, especially if it will reduce their margins.  For example, if a more sustainable plastic and slimmer container design has been introduced in the market but requires an investment in new technology and more expensive material costs, Plastic Giant is going to have to accept lower profit margins without gaining any additional benefit in the relationship.  As a result they may not align themselves with Clean Co.’s sustainability goals, and since Clean Co. has transferred ownership of process they lose their autonomy and may not even be aware of the missed opportunity.

     Finally, Clean Co. reduces their overall identity by blending the boundaries of the supplier – customer relationship.  Although the bottle itself may not be the direct output, it is a large part of Clean Co.’s branding.  If, for example, Plastic Giant has partnership with a graphic design firm that can design the bottle at a lower cost than the in-house team, this may incentivize Clean Co. to further outsource processes simply to further reduce that bottom line.  Should this become a slippery slope of shifting responsibility to gain efficiency, Clean Co. could lose resources, leading to a reduction in overall competitive advantage.

     This is not to say that creating these strategic relationships will automatically dilute a company, however it is important to stay aware of supplier reliance.  A supplier with deep knowledge of your organizational needs and expectations is an invaluable resource, but complacency in the relationship can lead to stagnation.  It is not unreasonable to stay up to date both in the shared process and in the state of the market.  Utilizing a sole supplier does not mean that all other suppliers cease to exist, and indicating knowledge of alternates will keep the pressure both on your internal team and your supplier to remain honest, involved, and strive for competitive value.