Dealing with Sole Sourced Suppliers

Sole source suppliers are a fact of procurement life.

Usually it’s not too bad, but sometimes sole source suppliers can become overly aggressive and entitled. 

This is most common when a supplier has a monopoly on the market due to being the designer or exclusive producer of a system or component.

What do you do with an out-of-control sole source supplier?

• First, recognize that what you have is a negotiating problem.
• Second, your negotiating problem is a power imbalance created by asymmetrical information.

Information asymmetry occurs when one party in a transaction has more or better information than the other party. 

However, procurement professionals can employ various strategies to reduce the asymmetry and restore some balance to your negotiating situation.

Reduce the Information Asymmetry

Sole sourced suppliers take advantage of two types of information asymmetry:

1. Technical Knowledge: The supplier knows how to produce a component or provide a service that you cannot easily replicate or source elsewhere.
2. Awareness: The supplier is aware that you lack alternative solutions.

Pro Tip

Bluff first. 

Begin by conceding the supplier has all the cards. 

Then explain you don’t want to make the effort to seek alternates, you’re happy to continue as is if the supplier will do whatever it is you’re negotiating for. 

For this to succeed you need to be personally credible. 

If you are a senior professional the supplier must believe you have the competence. 

If you are a junior professional the supplier must believe you have the resolve.

Do not threaten, be cooperative. You just need to convey that maybe this problem will become a priority, but you would rather it did not.

By being transparent, conciliatory, and disarming you have an excellent chance of getting most of what you want.

And if it fails you have not poisoned the atmosphere or committed yourself to any course of action. 

To counteract asymmetry, you must gather as much information as possible about alternative solutions. This involves understanding the market, identifying potential substitutes, and keeping the supplier unaware of any internal challenges.

The classic negotiating book Getting to Yes calls this understanding your Best Alternative to a Negotiated Agreement (BATNA). Knowing your BATNA is crucial to any contentious negotiation. 

Developing Alternative Solutions

Before seeking alternative solutions, you should have a good idea of what your intentions are. 

If you want to retain the current supplier but improve your negotiating position, then it’s in your interest to let the supplier find out you are shopping. 

If you intend to replace the supplier, then it’s in your interest to keep your efforts secret.

To identify alternate paths, consider the following approaches:

• Evaluate Other Suppliers: Even if the current supplier is the best option, identifying other potential suppliers can serve as a negotiating tool and will improve your understanding.

Use your network or internal company knowledge to identify potential suppliers.

 Other interesting tools are Globality which purports to use AI to find sources, and ImportYeti which shows the international supply chain of companies, you can use it to identify the suppliers of companies like yours.  

• Internal Capabilities: Assess whether your team can develop the necessary capabilities in-house, either fully or partially. This will be largely outside of your control since it will require engineering resources, but in some circumstances, you can get bids from contractors and outsource most of the engineering. 
• Product Modifications: Explore with engineering if modifying the product design is on the table, and again outside contractors are a possibility. 

Each of these alternatives will come at some cost, be prepared to weigh the cost of making a change against the cost of remaining with the current supplier. Hint: it’s almost always better to stay with the current supplier.

Understanding Supplier Interests

As with an any negotiation, understanding the interests of the other party is crucial. You probably already understand this, so here is just a quick list of why:

• Builds trust and rapport
• Helps to find common ground
• You can anticipate and prepare for reactions
• Better communication leads to better relationships
• Reduces conflict

Discovering supplier interests is an ongoing process but here are some key areas to focus on when dealing with sole source suppliers. Your best strategy will depend on the size of the supplier:

• Large Corporations

For major companies, the personal interests of your points of contact can be crucial. 

Understand their motivations, such as quotas or career advancement, and leverage these in negotiations.

• Smaller Enterprises

For smaller suppliers, explore a focus on economic stability. 

They might value long-term commitments, larger lot sizes, or favorable payment terms over high profit margins.

Building Supply Chain Resilience

Addressing the sole source issue often requires a long-term approach. 

Procurement is rarely the decider on this but can play a crucial leadership role by facilitating communication and creating awareness.

Here’s a roadmap:

• Risk Identification: Identify and document the risks associated with sole sourcing from this supplier.

• Cost – Has the supplier been raising prices? Is there a history of cost increases? Are they quoting cost increases for new orders? Do they cooperate with cost reduction efforts?
• Delivery – What are the on-time delivery (OTD) stats for this supplier? What is the trend? If poor OTD (less than 60% on time) is there a credible recovery plan?
• Quality – What is the acceptance rate? What is the failure rate in production? Does the product fail in the field?

• Technical Options: Work with your technical or engineering teams to evaluate and develop alternatives. This might take several months or even years but ensures future flexibility.

• Redesign – Can this item be replaced if the product is redesigned? Can a redesign be outsourced?
• Integration – Can this item be rolled up or integrated into a higher-level assembly on the BOM?
• Modification – Can the technical specifications be modified or relaxed such that more suppliers can produce the item?

• Supplier Development: Invest in building the capabilities of potential suppliers to meet your needs. Consider partnerships or design agreements to encourage potential suppliers to invest in improving their capabilities.

Immediate Actions

While long-term strategies are crucial, there are some immediate actions you can take to lay the groundwork:

• Contractual Clauses: If there is a supply contract in place, you can review it for any clauses that can be enforced to compel the supplier to meet their obligations. Highlight any penalties for non-compliance or incentives for meeting performance targets. Be careful though, any leverage may be outweighed by the sole source supplier’s leverage.
• Raise Awareness: Communicate the monopoly risk within your company. Engage stakeholders to understand the broader impact and gather support for your plans. 
• Dialogue with the Supplier: Clearly communicate your concerns about the risks of sole sourcing. Ask them to propose solutions for de-risking the relationship. Their response will indicate their willingness to collaborate on mitigating risks.
• Clarify Expectations: Make sure your expectations have been clearly communicated, including delivery schedule, quality assurance standards. Take care not to assume, miscommunication is a common cause of deteriorating relationships.
• Offer Incentives: Consider offering incentives to the supplier for improved performance, such as quicker payments, volume commitments, or even bonuses for meeting delivery dates.
• Value Engineering: Solicit the supplier for proposals to decrease the product cost or improve quality via value engineering. You might pay for the value engineering up front, or the supplier might amortize over some number of units (but note you will be even further locked into this number of units).

Practical Plan

If you find yourself in a scenario where you source a critical component exclusively from a single supplier that is becoming uncooperative, here’s a summary of how you can manage this situation:

1. Recognize the problem: Asymmetric information is weakening your negotiating position.
2. Take immediate actions: Are any plausible for your situation?
3. Know your BATNA: Understand what alternatives are available.
4. Know your supplier: Understand their interests.
5. Negotiate: With your new understandings conduct the best negotiations you can.
6. Build resilience: Invest in alternatives that give you more options for the future.

Dealing with sole sourced suppliers is complex but manageable. If you see it as a challenge, it can even be fun. 

By reducing information asymmetry, understanding supplier interests, and building long-term capabilities, you can encourage competitive quotes and reduce dependency risks. 

Implementing these strategies requires a combination of immediate actions and long-term planning, ultimately leading to a more resilient and flexible supply chain.

Be sure to keep track of your progress. Resolving situations like this is a highly valuable skill that might not show up in metrics. 

Additional Resources:

• Globality
• ImportYeti
• Getting to Yes