Approach and Implementation of Single Sourcing

Author: Abhirup Das, Debesh Majumdar, Devdut Saha, Ungratwar Sujeeth

Sourcing

The company decides to outsource the materials when it cannot produce it in-house or has insufficient in-house capacity. The different types of sourcing possible are

Companies follow one of the two sourcing strategies-single sourcing or multiple sourcing. Single sourcing is fulfilling all the needs of organization of a particular purchased item from one vendor by choice. When there is monopoly of the vendor then it is called as sole sourcing. In sole sourcing the company does not have choice but is forced to purchase from that vendor. There are many vendors in the market place in case of single sourcing but the company chooses just one of them to satisfy its requirements of a particular item. Multiple sourcing is fulfilling the requirement of a particular purchased item from more than one source. When a particular item is purchased from two sources then it is a special case of multiple sourcing called as dual sourcing.

In Deming’s 14 point for management, the fourth point requires that companies should purchase from single source rather than multiple sources. The Deming’s fourth point states “End the practice of awarding business on the basis of price tag. Instead minimize total cost. Move towards a single supplier for any one item, on a long term relationship of loyalty and trust” This has motivated some firms to follow single sourcing.

Single Sourcing

Some of the definitions of single sourcing are given below:

·         Single sourcing is purchasing all the needs of the organization from a single production facility.

·         Single sourcing is point of establishment of a relationship.

·         Single sourcing is fulfillment of all the needs of the organization of a particular item from a single vendor.

·         Single sourcing is having one source by choice while sourcing is having one source as no other option is available.

Many firms have started using single sourcing after getting influenced by the Deming’s 14 points for management. However selection of inadequate supplier can produce disastrous results for a firm which has decided to purchase all its needs from this supplier. Some of the advantages and disadvantages of single sourcing are discussed below

Single Sourcing Advantages

Advantages of single sourcing are

·         Better pricing through higher volumes: By following single sourcing strategy one will be placing the entire order to only one supplier. The supplier will provide discounts or provide the items at a lower cost because of the increased order size.

·         Inventory and Scheduling: The ability of the organization to schedule the delivery purchased item increases as the number of suppliers reduces to one. Improvement in scheduling of deliveries helps the organization to carry fewer of each item in the inventory.

·         Quality Improvement: Managers recognize this as the main reason for moving towards single sourcing. Due to single sourcing quality is improved in various ways. Quality improves during the selection process and due to the stringent quality requirements of the vendee.

·         Build long term relationship: As there is only one supplier the communication between the two will increase leading to better coordination. This will help in building long term relationship.

   

Single Sourcing: Disadvantages

The disadvantages of single sourcing are

·         Price escalation: Price escalation is the most common risk in single sourcing. Vendor increases price once it becomes the single source of the vendee.

·         Default Risk: The vendee can default because of one of the following reasons-fire, strike, natural disaster, vendor prerogative, etc. This will cause disruptions in the vendee organization. This may bring the operations in the vendee organization to a halt.

Selection Criteria for Single Sourcing

Classification of items/material:

A purchased item can impacts in terms of the volume purchased, percentage of total purchase cost, criticality on final product assembly or business growth. Availability, number of sup­pliers, competitive demand, make-or-buy opportunities, and storage risks and substitution possibilities are the parameters for assessing supply risk. Using these criteria, the company sorts out all its pur­chased items into the categories: strategic (high profit im­pact, high supply risk), bottleneck (low profit impact, high supply risk), leverage (high profit impact, low supply risk), and noncritical or commodity (low profit impact, low sup­ply risk).

The purchasing approach of organization is not same across the type of item it purchases. The company may need to support supply decisions of strategic items with a large battery of analytic techniques, including market analysis, risk analysis, optimization models, price forecasting and various other kinds of microeconom­ic analysis. Bottleneck items may require specific market analy­sis and decision models for resolution, while vendor and value analysis, price forecasting models, and decision models may come into play on issues affecting leverage materials. Where commodity items are concerned, simple market anal­yses, decision policies, and inventory op­timization models will normally suffice. Alteration in supply or demand patterns can alter a material’s strategic category. In many companies over the past few years, for example, coal has graduated from noncritical to strategic. Therefore, any purchasing portfolio classification is not static, rather dynamic in nature.

Market Analysis:

Subsequently the company weights the negotiation power of suppliers against its own strength as a customer It systematically reviews the supply market, assessing the availability of strategic materials in terms of both quality and quantity, the relative strength of existing vendors as well as its own needs and supply lines to gauge its ability to get the kind of supply terms it wants. Some of factors considered here:

Suppliers’ capacity utilization: This criterion indicates volume commitment and the risk of supply bottlenecks.

Supplier’s break-even stability: A supplier that achieves break-even at below 70% capacity utilization can ultimately deliver at lower cost than one who breaks even at 80% utilization. For the same reason, however, the first supplier will prove a tougher bargainer, for it can more easily delay negotiations and accept capacity underutilization.

Uniqueness of suppliers’ product: This is a function of natural scarcity (as in certain strategic metals and minerals), high technological sophistication, and/or entry barriers.

Annual volume purchased and expected growth in demand: Volume, the main determinant of the company’s overall bargaining power, is critical because economies

of scale in purchasing often yield a decisive competitive cost advantage.

Other Criteria:

A study (conducted with 2000 members of the National Association of Purchasing Management, US, representing  wide range of industries) which examines the supplier selection criteria of purchasing managers who have a preference for single sourcing and those who have a preference for multiple sourcing. The study shows that dependability and price are composite criteria have significant importance for choosing single sourcing over multiple sourcing. As firms rely on only one supplier, supply risk increases. Firms must be certain that the supplier can be depended upon. Within the dependability criterion, technical support available was a significant attribute. Also, purchasing managers having preference for single sourcing, place more emphasis on product reliability than those who prefer multiple sourcing. In single sourcing, relationship oriented attributes become more important than issues such as low price.

Not-so-significant attributes are product related attributes like ease of operation, impact on energy utilization, Cost of service contract; availability related attributes like breadth of product line, geographic proximity, warranties etc. Lowest price alone or previously proved ability to keep delivery promise also does not matter much for the proponent of single sourcing.

Figure: Significant Criteria for Single Source

Decision Making:

In the short term, for strategic items where the supplier’s strength outweighs the company’s and the indicated strategy is diversification, the company should consolidate its supply position by concentrating fragmented purchased volumes in a single supplier, even with a high price, and cover the full volume requirements through supply contracts. Same decisions apply for bottleneck items also; but to reduce the long-term risk of dependence on a single source, the company should also search for alternative suppliers or materials or even consider back-ward integration to permit in-house production. On the other hand, if the company is stronger than the suppliers, it can spread volume over several suppliers, exploit price advantages, increase spot purchases, and reduce inventory levels; these are the suitable policy for other two kinds of items.

Hindrances in Single-sourcing

The single sourcing procurement is a difficult procurement process to be implemented. There are certain hindrances in implementing a single source procurement initiative. These are as follows:

·         Corruption: The single sourcing procurement may lead to corruption. There is no competitive bidding process and hence the supplier chosen can be a bias. The buyer’s procurement department needs to show discipline in selecting the right supplier to single source the items. There are examples worldwide about the corruption involved in the single source supplier selection mainly in the government bodies like defense. It is very essential that the respective departments like engineering, manufacturing and procurement takes a unanimous decision on the selection of single source.

·         Large purchase volumes: One of the underlying ideas behind the single source is to order large volume to get the price advantage that would have been there in case of competitive bidding. The volume here refers to the total sales of the single source supplier to the buyer. The sales can be high if the no. of units ordered are high or the item is a complex one and hence expensive. The absence of large volume will not make the supplier motivated to become single source.

·         Skilled supplier: The single source supplier should be of high skilled to undertake the manufacturing of complex items. The skill is also required to produce the desired quality required which is the right product at the right price. The supplier should be able to cut down the cost of the production over time. The search and availability of such supplier is difficult and most of the time the companies had to undertake the vendor development process.

·         Time required for vendor development: Most of the time the companies had to undertake the vendor development process to develop the single source. The process takes long time and investment from the buyer side also. This process is not suitable for companies who are not doing well financially. Vendor development also requires expertise in the relevant field from the buyer side.

·         Total reliance on single source: The buyer has to rely fully on the single source for the supply of the items. Any setbacks to the supplier in terms of financial or natural calamities like earthquakes, fire, flood etc will have direct impact on the buyer which may result in loss of sales.

 

Characteristics of the single source

            Single sourcing demands some characteristics from the supplier to make the process successful. The characteristics of the single source are listed below:

·         Motivated and committed: The single source process design should have enough for the supplier to gain so that he is motivated and committed to the relationship. The motivation comes from the acknowledgement of the effort put in by the supplier and commitment of sales volumes. The relationship between the buyer and the seller should be a long term based on trust.

·         Flexibility in production: The order from the purchaser to the seller may vary in different periods and hence the single source supplier is expected to absorb the variation in the order with the flexibility in its production.

·         Innovation capabilities: The single source is expected to possess innovation capabilities which will help in improving the quality of the items produced and should be able to suggest improvements regarding the items procured by the buyer from him.

·         Reduce cost over time: The cost of the production should be reduced by the single source continuously over time. This will benefit both the buyer and the seller. This requires the involvement of the buyer also with the expertise or know how and information and financial support to the single source.

·         Take manufacturing of other related parts: Over a time the single source should be able to take the production responsibility of the other related parts. This will reduce the follow up required by the buyer with the different vendors and will also benefit the single source supplier with the increased revenue.

Transformation from Multiple sources to Single source

            This section provides a checklist for transformation from the multiple sources to the single source procurement model. The following steps need to be done:

Ø  The buyer must be able to identify the materials/items for which they want to go for single sourcing. This must take into account the cost-benefit analysis of multiple sources and single source for the items to be procured.

Ø  The vendors must be identified on the basis of their present capability and future potential. The best fit vendor should be chosen from the available set.

Ø  Sometimes the item may be a complex one and the vendors may not be available in the market. In such cases, the vendor must be developed by the buyer. The vendor should be technically competent and add to the competitive advantage.

Ø  The single source vendor should be given support from the purchaser. These support can be classified into the following:

o   Emotional/ Handholding: The buyer should have faith on the capabilities of the supplier and should have patience till the supplier develops.

o   Information/know how: The buyer should pass on the information related to the items and the processes to the supplier.

o   Financial: The single source supplier should be given financial support to develop its capabilities so that it can add competitive advantage to the buyer.

o   Technical: The technical expertise of the buyer regarding the items should be shared with the supplier so that the quality requirements are met.

o   Market: The buyer should be able to commit sales for the supplier so that it keeps the supplier interested in the relationship. The motivation of the single source is very essential in developing this procurement strategy.

References

1. Wilson, Scott and Pyman, “The extent of single sourcing and attendant corruption risk in defense procurement”
2. http://www.purchasing-procurement-center.com/single-source-procurement.html
3. http://www.defenceagainstcorruption.org/diagnosis/single-source

      4.   Swift, C. “Preferences for Single Sourcing and Supplier Selection Criteria”,    

Busnres 1995. 32.105—111

5. Kraljic, P.” Purchasing Must Become Supply Management”, Harvard Business                     Review September-October 1983
6. Mark, T and Sharon, B“A Risk /Benefit Analysis of Sourcing Strategies: Single vs. Multiple sourcing” Journal of Operations Management, vol 7, no 4, December 1998

Achieving Competitive Edge through Supply Chain Management

Introduction:

Globalization and its effects in terms of new business opportunities and risks resulted in shifting from decoupled decision making processes towards more coordinated and integrated processes among different entities which share a common goal of offering goods and services at appropriate cost while achieving customer satisfaction level. Network of these entities used to deliver goods and services from raw materials to end customers through an engineered flow of information, physical distribution and cash is termed as supply chain[1]. Management of the supply chain refers to the design, planning execution, control and monitoring of supply chain activities with the objective of creating the net value for the each member of the chain while building competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, adopting sustainable business practices and measuring performance in a holistic way.

No doubt, thought the term supply chain is relatively new, there are huge amount of literature and normative tools have been developed from 1960’s (often referred to as materials logistics management at that time)[2]. This paper will focus on best practices in supply chain management across industries, sighting specific examples taken from current business scenarios across the globe.

Best Practices in Supply Chain Management across Industries 

1. Adopting Process View of SCM: The SCOR Model

A supply chain can be viewed as linked organizations – suppliers, producer and customer linked by product (and/or) service, cash and information. But collaborative planning across these organizations needs to view the chain as a set of linked processes, carried out by various functional areas within the organizations that constitute the supply chain. The Supply-Chain Council has endorsed a process reference model named Supply-Chain Operations Reference (SCOR). There are five decision areas provided in SCOR Model Version 4.0 (PLAN, SOURCE, MAKE, DELIVER and RETURN) and nine key supply-chain management planning practices derived from supply-chain management experts and practitioners.[3] Supply-Chain Council members can enhance their understanding of their supply chains and associated processes and improve their performance. Business problems commonly solved by applying SCOR model are:

• Supply optimization and Re-engineering - improving individual, clusters, or networks of supply chains
• Streamlining - improve operational control and cost by standardizing core processes, management tools, reporting and organizational structures
• New venture - create and deploy supply chains
• Benchmarking - competitive assessment of qualitative and quantitative performance
• Process Outsourcing - identifying and outsourcing non-value adding  processes

An exploratory study[4] on linking SCOR planning practices to supply chain performance shows that: for the Plan decision area, demand planning, including forecast development activities has a significant impact on supply chain performance. Collaborative planning processes including defining product and customer priorities; establishing customer and supplier relationships; analyzing customer behavior and demand variability information; reviewing product and customer profitability information and establishing supply chain performance metrics also can have an impact. The Source area includes the documentation of procurement processes and establishment of supporting technology and the management of supplier inter-relationships including strategic partnership. Make decision area includes collaboration tasks among the sales, manufacturing, and distribution organizations during the planning and scheduling process; a joint appraisal of the needs of the business among these entities; and the establishment of performance metrics for the monitoring of schedule adherence. For Deliver decision area, key integration features include the formation of inventory control mechanisms and metrics for each hub in the distribution network, along with the use of automatic replenishment throughout the network. Indicators of delivery process credibility include the extent to which customers are satisfied with current on-time delivery performance, the ability to meet short-term customer demands, and the customer's confidence level in projected delivery commitments. The Return decision area recognizes the growing importance of the reverse supply chain which involves replacement, warranty repairs, recycling or disposal of used items.

SCOR provides numerical values for performance attributes (namely, supply chain reliability, responsiveness, flexibility, costs and asset management) for the decision taken in the above mentioned areas, which can be used to compare the performance in industry best or best in class level.

Adopting the process view of supply chain (SCOR model was an example) provides useful guidance in developing cross functional, cross company approaches to manage these processes, while managing silos tends to focus attention on increasing speed and cost efficiency in one area of the whole chain without regard to other area. The process view also helps continuous refining of the processes that flow along the chain among the partners.

2. Deciding No. of Supply Chains According to Product Line and Market Segmentation: SCM at Zara (Spanish Clothing Retailer)

Generally, products can be categorized in two types:[5] functional products tend to have longer life cycle, staple-type goods with predictable demand and typically low margins. Innovative products are having short life cycle, new-concept goods with unpredictable and volatile demand and typically high margins. The unpredictability of demand also creates overstocks for some Stock-Keeping Units (SKUs) and shortages for others, so that for innovative products we would expect to see both higher markdowns (at end-of-season) and higher out-of-stock situations. For example, these two costs are particularly high in the apparel industry; they have been estimated to be as high as 30% of all costs for apparel companies and apparel supply chains[6].Zara, the renowned fashion chain, makes its most fashionable items (half of all its merchandise) at a dozen company-owned factories in Spain and Portugal, particularly in Galicia and northern Portugal where labor is cheaper than most of Western Europe. Thus, it gets the fastest response time for its innovative and trendy products. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.[7] Practically, it has two supply chains according to the market it serves. With more than one supply chain, it can move its products from one chain to another in response to changing variables, such as type of channel or lifecycle stage of the product.  Zara successfully aligned its supply chain strategy with its business goal of serving different product lines by instituting different sourcing alternatives.

3. Change in Supply Chain Strategy in Response to the Change in Business Direction: Toyota Distribution System for Prius

Toyota Motors faced the problem of complete recasting of the supply chain when it brought the hybrid car Prius[8]. As there was no demand history was available for forecasting sales or segmenting market, Toyota changed its logistics network from dealer based sales outlet to reflect the uncertainty about the location wise demand. It sent the vehicles to central distribution centers (DC), as the larger pool at DCs would reduce the probability of stock-outs due to unexpected surge in demand in any one region. It also adopted postponement facility at DCs to allow customizations. Though the system became more expensive, it was able to offer more flexibility in delivery. Vehicles were shipped only in response to customer orders forwarded over internet. Actually, the demand was far exceeded compared to normal Toyota vehicles in northern Carolina, and the opposite things experienced in the Southeast. Toyota’s initial order-based strategy allowed it to accumulate excellent data on geographic and demographic distribution of sales. With respect to the Prius, Toyota found that the average consumer is geographically diverse, middle-aged and environmentally friendly, has a desire to stretch the dollar, is committed to reducing oil dependency, well-educated, affluent, and helps to shape the buying decisions of America. For Toyota, that appeared to cover a lot of potentially profitable bases, so it has since placed a far greater focus on its hybrid initiatives.

This example establishes the fact the chain should be re-engineered in response to the inevitable change in the competitive environment. The company needs to be innovative, not only in terms of product design but also in organizational design and supply chain processes.

4. Reducing Bullwhip Effect through Collaboration: VMI System in Grocery Industry

While demand fluctuations mostly happen at the retail end of the supply chain, variability ripple up mostly at the supply end of the chain, with the amount of variation growing up at each link, a condition defined as bullwhip effect.

Vendor Managed Inventory (VMI) is a process in which a supplier generates orders for its distributor based on demand information sent by the distributor. With VMI, suppliers generate orders based on mutually agreed upon objectives for inventory levels, fill rates and transaction costs, and demand information sent by their distributor customers. In this process, the buying function moves from the distributor back to the supplier, who takes over responsibility for placing orders. The distributor sends sales and inventory data to the supplier on a pre-arranged schedule---typically, daily---and the VMI system determines what should be ordered based on the criteria the supplier and distributor have established. The supplier monitors the inventory status information to make sure that the distributor always has the appropriate amount of stock on hand when needed. The distributor can override the system when necessary, for example, if they anticipate an increased demand in the market.

VMI was first applied to the grocery industry, between companies like Procter & Gamble (supplier) and Wal-Mart (distributor).[9] The first relationship was built for the diaper supply chain. P&G, by using Wal -Mart sales data, would determine the appropriate retail inventory levels of its products. VMI became one of the key programs in the grocery industry’s “quick response.” Successful VMI initiatives have been promulgated by other companies in the United States, including Campbell Soup and Johnson & Johnson and by European firms such as Barilla, the pasta manufacturer.[10] The benefits of VMI result from better information flow to both parties. The retailer and supplier are better able to track demand in the market. Lower inventories, better in-stock positions and increased sales are the significant benefits associated with VMI for the distributor. Suppliers benefit from the increase in sales as well as smoother demand and consistent orders. Both parties benefit from reduced administrative costs, better information flow and a superior ability to place, manage or follow-up on orders.

5. Educating and Integrating the Supply Side: Sourcing Strategy of McDonalds’ India.

Consolidation has greatly affected both the side of supply chain, but it is more prominent on the supply side. MNCs across the globe now want their chosen supplier to be responsible for a larger component system; they want them to achieve continuous quality and performance improvement. They seek suggestions from suppliers during product design phase and collaborate for strategic growth and strengthened operations. Consider the initiative taken by McDonalds’ India to develop their supply source to meet its quality standards[11]. McDonald's is built upon the values of QSC & V (Quality, Service, Cleanliness & Value) and to deliver these values consistently, one of the biggest hurdles was the limited availability of an effective cold chain network in India. Additionally, there were no processing facilities as well as limited availability of high standard raw products. To overcome these barriers, six years prior to the opening of its first restaurant, it worked very closely with Indian farmers and processing facilities to bring in the latest technology in farming, processing and cold chain through technology transfer arrangement between its international suppliers and Indian businessmen. Like for the supply of cheese, it chooses Dynamix Dairy and introduced Dynamix to two of its global supplier. This resulted in a joint venture with company and succeeded by yearly exports worth $12mn. McDonald's benefited by availability of products matching global standard and the supplier got access to latest technology and exposure to new markets.   

McDonalds’ has established a scientific centralized supply and logistics system starting from the farmer level and the onwards to the factory, distribution centre and finally to their restaurants by educating/ training farmers, suppliers, distribution centers and employees in restaurants to maintain standards. The biggest change that McDonald's brought about in food processing in India is introducing the concept of HACCP and GMP to its supplier's way back in 1995-96.[12] All McDonald's suppliers adhere to Indian Government regulations on food, health and hygiene while continuously maintaining their own recognized standards.

6. Enabling Processes with Information Technology (IT): The e-Supply Chain of a Manufacturing Company

Role of IT in SCM was generalized as smoothing transaction processes while keeping the cost low. But nowadays, IT is viewed as the facilitator of information sharing, coordination and decision making across the supply chain. It has changed the way of doing business, helped to achieve operational benefits like reduced cycle time or level of inventory. From strategic point of view, it created new opportunities along with competitive advantages. Common technologies used in present business scenarios are ERP, EDI, XML (system to system integration), internet, extranet, B2B marketplaces (web portals), and 3rd-party transaction hubs that provide B2B integration services. Here is a brief analysis of how supplier web solution has enhanced the efficiency of SCM of Rocla, maker of automated guided vehicles and electronic warehouse trucks. Implementing the supplier web resulted in savings of 2.5 man-years in ordering and checking invoices, as suppliers have real-time visibility to Rocla's order (item, quantity, price, and delivery date) and they are asked to keep the track daily.[13] The system also improved the quality of data through consistency mapping.

Conclusion:

Before deploying best practices across supply chain processes we should understand that a right supply chain strategy exists only for a given competitive strategy.[14]Achieving the strategic fit is not possible when all the functions contributing to a company’s value chain acts in isolation. Thus, before taking any improvement measure for a particular functional area, its impact on the other supply chain areas must be identified. For example in the Toyota case discussed above, moving to a centralized distribution system would reduce stock out risk for a particular zone, but transportation cost of this supply chain would increase. Organizations need to be cautious while making the trade-offs between supply chain efficiency and responsiveness. Also, without proper communication among affected functional areas and coordination by higher management, desired level of strategic fit is not likely to achieve.

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[1] APICS Dictionary 12^th Ed.

[2] http://www.ism-journal.com

[3] http://supply-chain.org

[4] International Journal of Operations & Production Management, Volume:24 Number:12 PP 1192-1218

[5] Fisher M, "What is the Right Supply Chain for your Product", HBR, March-April ’97

[6] http://www.allbusiness.com

[7] http://www.businessweek.com/magazine /content/06_36/b3999063.htm

[8] SCM Fundamentals, APICS CSCP Learning System, ‘09 Ed.

[9] Vendor Managed Inventory- Promising Value By Carl Hall

[10] Waller, Mat and Johnson, M.E., VENDOR-MANAGED INVENTORY IN THE RETAIL SUPPLY CHAIN, Journal of Business Logistics, ‘01

[11] Kotler, Philip, Marketing Management, 13^th Ed.

[12] Source: Interview of Mr. Arvind Singhal, Director- Marketing, McDonalds’ India. (Madazine, Annual Marketing Magazine of VGSoM)

[13] Auramo, Kauremaa & Tanskanen, International Journal of Physical Distribution & Logistics Management, Volume: 35, Number: 2, Year:’05 pp: 82-100

[14] Chopra S & Meindl P, Supply Chain Management, PHI, 2^nd Ed.