Understanding single sourcing
Single sourcing is when a firm has just one supplier for a particular input. Rather than having multiple suppliers who each supply a proportion of the input (i.e., dual or multi sourcing), the firm has an exclusive supplier who makes up 100% of that particular input.
Single sourcing does not necessarily mean that there is only one supplier overall. Rather the firm may source 100% of input A from one firm, 100% of input B from another firm (i.e., different materials sourced from different companies). The key distinction is that for a particular input, there is only one company that supplies that material or component.
When single sourcing can make sense
While there are many advantages that come with dual or multi-sourcing, there are some situations where it can make sense to source all of the inputs from a single supplier. Some examples of situations where single sourcing can make sense include:
Only one possible supplier
The first situation where a single supplier may make sense is if there are no other alternatives to this. There may only be one fir that supplies a particular input, meaning that you have no other opportunity to buy the needed items except from that single supplier.
Easy to change supplier
It can also make sense to source from one supplier when it is very easy to change suppliers. If there are lots of firms that could possibly supply your input (for example where to buy your paper from), then sourcing from multiple companies may not be needed – should you run into problems with your supplier then you can quickly turn to another firm.
Deep integration required with the supplier
Single sourcing may also be advantageous when there is deep integration required between that firm and your company. If you must share a lot of information with the supplier, or the supplier must make substantial changes to fit your operations, then you may need to source from one firm. A supplier may be unwilling to make these investments unless they are assured of all of the orders.
Of course, it is important to be aware of the potential that this situation can lead to your single supplier becoming overly powerful. Make sure to consider the supplier’s power in this situation, and analyze whether you are putting yourself in a weak bargaining position by locking yourself into that firm.
Difficult to obtain equal quality inputs from multiple firms
Single sourcing may also be needed if you struggle to get a reliable supply from a particular company. If one supplier’s quality is inferior to another’s, this may cause issues with your production process, or cause may cause customers to complain about varying product quality.