The purchasing department likes to use multiple suppliers for parts, because it can not only play one supplier off against another for the lowest price, but also ensure a backup source if the primary supplier is unable to ship items to the company on time or ships items having sub-standard quality. However, an undue focus on the lowest price tends to result in lower-quality goods or degraded service from suppliers, while the purchasing staff must also deal with extra suppliers and buy in lower quantities, which tends to yield higher per-unit supplier prices. Further, it is more difficult for the receiving staff to identify the same items coming from different suppliers, due to differences in packaging.
For all these reasons, it is frequently better to trade off a modest price increase in favor of higher quality, improved shipment reliability, and consistently identifiable packaging from suppliers. In particular, the purchasing staff will find itself using far less paperwork to place orders when it can concentrate all orders for a specific commodity with a single supplier. Multiple-supplier sourcing may still be required for key components where supplier reliability is suspect, but this is still a reliable best practice to pursue for the bulk of all items. A side benefit of single sourcing is a reduction in the amount of supplier management time, since there are fewer of them (and fewer contracts) to deal with. Also, a supplier receiving a higher volume of company business will be more inclined to accept a request for frequent deliveries of small order sizes. Further, if there is a quality problem with an item, there is no question about determining which supplier delivered it, since there is only one supplier for each item. And finally, the development of long-term relationships with a small number of suppliers can result in other benefits, such as joint product development programs and the sharing of cost-saving ideas that can benefit all parties.
Single sourcing works best when the merged level of company demand results in significantly higher purchasing volumes being offered to suppliers, since they become much more willing to work with the company to achieve its inventory goals. Conversely, very small companies will find themselves with little additional sway over their remaining suppliers, since they do not buy in large enough quantities. Also, if there is a significant risk that a supplier will go out of business, a secondary supplier must be used to ensure a steady flow of materials.
Companies implementing this best practice should devise a supplier rating system based on such items as the percentage of on-time deliveries, quality, and price in order to determine which suppliers to retain.