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Shuo Wang

Quality Insider

The Case for Single Source Procurement

There are advantages

Published: Tuesday, August 18, 2015 - 10:51

As a buyer of manufactured goods in China, how many suppliers do you use for production? Have you ever considered your supplier development strategy? Or, maybe you don’t really have a strategy for developing suppliers. If you’re accustomed to utilizing multiple suppliers, satisfied by the benefits of their price competition in the past, are you still playing the same game in China today? Do you want to enjoy the streamlined communication and relative simplicity offered by using a single supplier?

Utilizing a single supplier occurs for one of two basic reasons. The first reason we typically call “sole source procurement,” meaning we have no other choice but to buy from a lone supplier. The second is referred to as “single source procurement,” which occurs if your company voluntarily decides to buy from only one supplier. For example, by choosing to purchase only Dell computers, Dell becomes your single source by choice. However, unlike those who sole-source, you and your company have the choice to switch suppliers. To do so not only involves a material price consideration, but also a consideration for overall leverage for aspects like quality, service, and marketing strategies.

Some companies have trouble separating the obvious benefits from the potential risks of using a single-supplier sourcing strategy. This tendency has become even stronger in the last few years, especially throughout China. The reason is quite obvious—quickly climbing production costs. The solution many foreign companies take in order to lower their material costs is to involve various suppliers who compete for a lower price.

Single source (or sole source) is considered risky from a traditional point of view, so buyers are usually advised to avoid it. According to the traditional view, quality, cost degradation, and supply chain risk are the three main areas where single source risks are identified:
1. Quality risk—A serious quality defect could cause a fatal strike to the market reputation of the buying company.
2. Cost degradation—Once the supplier takes your resource channel, they will then get a “resource-monopoly” position. No matter if they are “sole sourced” by necessity or “single sourced” by your own decision, they will become more powerful in future price negotiations with you.
3. Supply chain risk—This is a direct threat to your supply chain. As an extreme example, just imagine if your only supplier’s factory caught fire. What kind of disruption would this be to your whole supply chain?

At first look, using single suppliers does appear to be a highly risky solution. But, as we look at it from another perspective, single-source procurement actually is quite different from a sole-source situation. As a proactive selection, it’s an active strategy. Potential risks are often over emphasized by companies when trying to develop a supplier plan.

Delving into the evidence

In May 2015, I was invited to deliver a speech about single-supplier management at a sourcing summit in Beijing. A survey was conducted that asked 50 professionals, employed in China sourcing offices throughout various Fortune 500 companies, questions about their supply chain. The survey revealed the following interesting results:

Click here for larger image.

The results from this survey display the difference in opinions surrounding the use of multiple suppliers versus a single source. This data clashes with the actual experience reported by many China-based procurement experts.

Challenging the traditional view

1. Challenge to quality risk:
The quality concern is part of frequent discussions surrounding products made in China. It has already garnered the attention of the whole nation, and huge measures have been taken in order to change public opinion.

When looking at this from a supplier’s perspective, we should ask ourselves honestly, “Can prohibition of single-source procurement really solve this problem, and keeping the survey results in mind—will things really get better?”

What is the real root cause? Let’s look at the typical scenario of a joint venture in China:

Imagine a 200- or 300-staff factory, relatively small by China standards, located in one of the thousands of industrial development zones in China. These zones are usually located in relatively rural areas on the outskirts of big cities. Most young engineers are recent graduates that lack work experience in their field. This plant is responsible for the assembly of electronic control panels with orders taken from their U.S. headquarters whose final products are sent all over the world. Work lines are continuously busy and demanding, with shipments always being pushed back, causing delays.

I have quite a bit of experience with these kinds of factories. On an optimal day, these factories can run 24 hours a day in order to meet the large order requirements asked by headquarters. However, quality issues are also a big headache for their Western headquarters operating thousands of miles away.

What would be a typical root cause of quality issues in these cases?

• A design problem: Keeping the following situation in mind, you can gain a better understanding of what can happen. A young, unskilled R&D engineer, working with a great number of suppliers, commonly leads to reduced levels of efficiency. Making mistakes in design and lacking adequate time to help the suppliers correctly understand the design requirements makes a challenging task even tougher. Along with poor internal alignments in quality and production engineering, sourcing cross functions make it extremely difficult for suppliers to follow. Now we know that the multi-source strategy is not necessarily the right solution to quality, while a reasonable, deliberated single supply strategy could be.

• Poor communication: Another major cause for quality issues in production can be directly correlated to poor communication. Cultural differences are usually seen as the main hurdle of success between a Western buyer and their Chinese supplier. But keep this in mind: frankly speaking, many Western managers working in China generally subconsciously assume that their Chinese suppliers should have known what the Western suppliers know and should have similar experience and education backgrounds as those in their home countries. This assumption is quite normal, due to projection bias. As Western buyers communicate with new Chinese suppliers, it’s very easy to fall into thinking traps like, “Why can’t they produce strictly according to my drawings?” Check whether you have omitted certain specifications or documents, such as tolerance or other industrial standards; most likely your standards are new to them. Don’t be surprised if your new Chinese supplier has been in business less than 10 years. Especially in China, everything runs so fast, that you’ll find many of your vendors are comparatively young. To get better performance from them, put yourself in their shoes and be careful to provide detailed specifications and requirements early.

• Lack of systematic training sessions to help your supplier improve: In some situations, such as electronic assembly lines, you will likely encounter highly-mixed bills of material, lots of small demands, and frequently updated versions. As in the U.S. client’s story, the best way for you to manage improvements is to set up training programs for your supplier. We often push suppliers hard on lower prices but the best way to help ourselves is by actually helping our supplier.

2. Supply chain risk:
Single source procurement means that there’s only one supplier available to provide you with the specified commodity or service. Any disruption to your supplier can have devastating effects on your supply chain. In general though, the probability of that is low.

However, when a shock to supply really happens, multi-supplier sourcing may not be a the answer. A single-source strategy could actually prove more effective under certain situations. Recall the Japanese Fukushima nuclear leak that happened back in 2011 and the shockwave that was felt in the surrounding areas? The Fukushima region plays a large role in providing a key raw material to the global electronic industries. The leak’s effects actually spread to all related businesses and their downstream manufacturers, all the way to end users. Traces of the effects could even be found on the other side of the Pacific. So under the globalized structure of market and labor division, no one is really immune to a worldwide supply shock.

Coming from such a devastating situation, a Western company managed to leave quite a lasting impression. They quickly recovered in just the first week following the disaster. Their reason was relatively simple—they were the only ones who signed an exclusive supply contract with a distributor in their region.


3. Cost degradation:
If you think that the multi-source tactic can help you in price negotiation, it might not be as easy in practice unless you have a large-enough demand behind you. China is home to the largest number of suppliers in the world, with a majority able to produce and store huge amounts of product. Therefore, if you think you can obtain lower prices by increasing your supplier numbers, you might need to go up in scale. You’d have to provide a significant enough volume to catch numerous suppliers’ attention. Otherwise your attraction to each supplier is diluted. You also need to be prepared for lower unit margins because of the market competition and because many industries maintain a very low profit rate. If you decide to work with several suppliers on the same molds and same production, for example, then you’ll have to double or triple your fixed assets investment. That will be an additional burden placed on your return.

In addition to the contract price, there are many more costs coming from quality, transportation, and other hidden aspects. Unit price isn’t everything.

Multi-source procurement used to be popular in the automotive industry, but when comparing American and Japanese auto companies, you’ll find that the Japanese used more single suppliers because they’re more competitive. Why does that happen? The reason behind it is cultural—the Japanese place more emphasis on relationships when it comes to their business culture. Relationships with long-term cooperation between companies can reduce the suppliers’ marketing efforts and risks. So suppliers would often rather accept a lower price to keep this long-term relationship going. This makes them more cost-effective than their competitors.

Speaking of these, a single-source procurement strategy has great potential in the new era of business. In order to maximize your returns for doing business in China, the best strategy is not the old, straightforward competing mindset. The new mindset is to find a good supplier and keep a consistent, conflict-free, mutually beneficial, and long-term cooperation between the two companies.

Three tips for using a single-source procurement strategy in China

1. Embrace the advantages a single supplier offers
The traditional views emphasized the risks and negatives of using only one supplier for purchasing. Traditional-minded buyers are risk-averse, and worry about the potential damage caused by a disruption in supply when using a single-source procurement strategy. Instead of splitting focus between multiple suppliers, choose a dependable supplier and deal with problems as they arise. This can be a better solution than the traditional method in many cases.

This is actually a solution based on a relatively new perspective. In earlier times, the Chinese learned how to deal with floods by digging canals instead of building dams. This is a good metaphor to illustrate the point about utilizing a single source strategy. There are those who refuse to take on the risks of using a single supplier. However, if you grasp the advantages of focusing on a single supplier, you’ll be able to channel those advantages productively and exploit the additional benefits.

2. Remember, sometimes “more is less!”
By way of example, a European client in China had about 2,000 local suppliers for only 500 different items—meaning four vendors per product on average! Remarkably, there were only two buyers responsible for all of the daily purchasing. Too many suppliers can cause low work efficiency and hinder your team spirit.

3. A systematic supplier development plan
If you really care about your supplier’s quality and want to improve it, the best way is to set up a supplier development plan and train them with patience.

What is a supplier development plan?

In normal practice, there are different theoretical approaches to “supplier development” (SD). The popular approaches include the theory of transaction cost economics (TCE), resource dependence theory (RDT) and others.

The most recently developed SD systematic theory is called knowledge chain theory. The theory works by integrating nine different aspects of an effective supplier development plan into one systematic approach. The knowledge chain theory is a wide-ranging approach, and would be a great fit for the complexity that often comes from doing business in China, having practical applications to most real-life situations.

Conclusion

When purchasers ask the question, “Should I use a single source or multiple suppliers in China?” they may be asking the wrong question.

The answer to finding a sourcing solution should focus on developing a creative, reliable, and long-term supplier partnership. That’s what really matters when it comes to a healthy and successful business solution while manufacturing in China.

First published July 15, 2015, on the inTouch Manufacturing Services blog.

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About The Author

Shuo Wang’s picture

Shuo Wang

Shuo Wang is a Chinese freelance writer and coach on supply chain management improvement. He founded SmartFly consulting firm in 2004 and is a member of the Society of Decision Professionals. He has 18 years of global experience in supply chain management and low-cost country sourcing, having held senior positions in various industries, including working in Shell Oil and Gas, Siemens Building Technology, and Vestas Wind. From billion-dollar projects management to strategic sourcing activities, he focused on helping clients improve performance end to end. He also devotes time as on the NPO board helping Chinese Youth achieve better life by making good quality decisions.

Comments

Deming and Sole Source

Consider reading some of W. Edward Demings theory on sole source. Long term reatlionships. The supplier is part of your business system. Working towards win / win situations in long term realtionships and collaboration.