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When we are dealing with a single source supplier, the general misconception is that your position as a buyer will be weak. The buyer is never in a weak position if you have full faith in your abilities to negotiate a situation.
Based on my own work life situations, I can suggest you to start negotiations by convincing the sole supplier that we are not a buyer and seller but we consider you as a partner in our business hence our business dealings with you shall be to our mutual benefit. This will definitely put the supplier at ease. Next you can carry on the negotiations to get the best possible price and delivery terms. Negotiation is the key here and this is what we do all the time. If you are successful in building a good relationship with your supplier I see no difficulties in dealing with single source suppliers.. Believe me, I have been into these situations 90% of the time and have had very good results. Contractual terms and SLA's is only a tool and evidence that you have worked within a framework but there is absolutely no guarantee of supplier adherence. Let's negotiate and win.
All the best,
What is “single source supplier”? It’s a mode of purchase with several suppliers or vendors (Multiple options are available) that can deliver a particular product, material, goods or services, however, the buying organisation decided to buy or contract from one supplier, taking into consideration the supplier that offers the best overall value or Total Cost of Ownership (TCO) for the organization. TCO includes; direct acquisition costs, indirect costs such as inventory management, quality assurance, administration and payment.
What is “Sole source supplier” (no alternatives)? It is the only source for the product, material, or service that the buying organization needs to purchase. Sole source suppliers are more complicated to deal and negotiate with. It is different from single source supplier.
The similarity between sole source supplier and single source supplier is that, both purchasing require buying from only one vendor, supplier or manufacturer. This is a very risky position for any company to find itself due to their total dependence upon the services of single vendor, supplier or manufacturer.
How to ensure that “Single source” respond to your RFQ with better price, delivery, quality etc., are:
§ Ensure your organisation put in place stringent regulations that protect its interest, that must be adhered to before single source procurement can be undertaking and authorized.
§ Use the principles of strategic sourcing process,
§ Apply competitive bidding parameters
§ Be Ready with an Alternative Sour, since other similar suppliers should be able to supply similar products with more or less that same quality as the previous suppliers. The suppliers would know this as well and would be more flexible and willing to offer reasonable price and terms when negotiating and more accommodating. (This is not applicable to sole source).
§ Ensure your contracts are tightly drafted to avoid any situation where you cannot change the single source supplier/vendor.
§ The use of smaller suppliers price or cost template to negotiate lower price
§ The use of splitting the order between the single source supplier and a smaller supplier, by awarding 70% of the supply to the bigger supplier and 30% to the smaller supplier, would soften the single source supplier stand.
How to ensure that “Sole source supplier” respond to your RFQ with better price, delivery, quality are:
· You must always attach importance and value your organisation brand name.
· Find out what motivates your sole vendor, supplier or manufacturer and integrate it in your RFQ to make it a win-win. Because every vendor, supplier or manufacturer have primary motivations for offering lower price, prompt response/delivery, quality product etc.
· Gather enough information on the strategic importance of the contract or project from your supplier website and through your company’s marketing team. As the information you get would place you in a vantage position to negotiate better offer for your organisation.
· Identify how important / costly it would be for the supplier to lose you as a customer.
· Estimate your organisation need and the needs of the supplier in the negotiation and trade off those needs that are less important to your organisation for those needs that are important to your organisation from the seller.
· Create tiered risk/rewards scenarios for Service Level Agreements. Vendors, suppliers and manufacturers in a sole source contract would often agree to service/performance based contract. Ensure you add some incentive on the risk side of the contract such as more revenue for exceeding performance expectations.
· Try to include little value addition to enhance the deal. Once vendors know they are getting a deal in a sole source situation, they are less likely to offer a reasonable price and terms that would suit the buying organisation.
· You can propose an incentive for early delivery to the sole source supplier. In other words if a supplier deliver your goods or project earlier than schedule, what do you stand to gain? If it add some profits to your organisation, you can as well give something back to the supplier to motivate him.
· Evaluate consequencies of No Agreement to the supplier or vendor and determine the short- and long-term impact and costs to the supplier for not reaching an agreement
· Use the leverage of a long term contract
· Leverage on company-wide spends to supplier. In other words if the supplier knows the huge amount your organisation is ready to spend to acquires goods or services from them, the supplier would be very much willing give reasonable discount that would impact on your company’s bottom line.
· Explore segmentation approach. Present the idea of competitively bidding part of your requirements.
· Agree on an objective price adjustment scheme for the future. Sole source situations can lead to repeated, futile negotiations and unreasonable inflation year in, year out. Hence try as much as possible to have a written and binding agreement on future price agreement that is fair to both parties. That is the buying organisation and the sole source supplier/vendor. This prevents you from being reaped off by the supplier/vendor.
The above tips can help to get a better deal from Sole source supplier/ vendors
However, try to avoid a sole source/single source scenario in your organisation by ensuring the early involvement of procurement department when the Engineers or Chemist drawing up the specification, to ensure that specification are not drawn or tailored to suit a specific manufacturer. Which now compel procurement to stick to a sole or single source supplier. This issue can be brought to the notice of the executive management of the company or the CEO or the MD.
I guess if we are left with no choice, then a very robust scope, specifications and SLAs would work, so that you dont get taken for a ride due to them being the sole providers.
