02 November 2000
Q: How do I manage the risk associated with a sole supplier policy for strategic materials and services?A: Colin Bell, director at Purcon-SCI, writes:
The risks associated with single sourcing fall into three main areas: lack of competition, risk of major disruption (for instance, a fire on the supplier's premises) and limits to innovation.
- Lack of competition: Select only suppliers that are able to demonstrate their competitiveness. Agree market and external cost benchmarks against which their prices are monitored. Work towards making the supplier lowest-cost producer for you by minimising duplication and waste. And ensure that they proactively manage cost-cutting initiatives specifically for you.
- Risk of major disruption: Get your strategic suppliers to present their disaster recovery plans to you and colleagues in other functions, such as production. This should be a comprehensive plan that identifies likely causes and provides contingencies that deal with your goods and services. This should dovetail with your own risk or disaster plan, which may include different component and production processes. If you are not satisfied, think again, but do involve the prospective supplier and don't give up too easily.
- Limits to innovation: The risk here is that if you rely on one supplier to design your new components, their designs could be based on what they can or want to make. Companies that successfully involve suppliers in design often do so by creating joint teams of their own and their supplier's design staff to monitor market innovation and competitor products.
Probably the most important criteria for single sourcing is collaborating on mutual interest in an honest and information-rich manner. Without this, the relationship may fail in the medium to long term.
Lastly, you need some sort of agreement with each supplier. You will have to decide how legally binding you want this to be and this will depend on the impact of the risks involved. However, remember that the more tightly bound the contractual conditions become, the less suppliers will feel able to accept stretching objectives, which are the lifeblood of strategic supplier programmes.