Single source arrangements between companies are often a source of stress for management, supply chain and operations personnel on both sides of the table. Provided it is managed intelligently, the relationship can be long-term and beneficial to both parties. But just a little bad luck or poor management by either side, can quickly escalate into a financial catastrophe.
I have had the good fortune to have had roles on both sides of the single source table, first in purchasing, then in management roles. Initially, the challenge is to find a supplier with the knowledge, equipment and interest to provide materials with specifications far in excess of what is currently available in the market. In some instances, I was asked to find suppliers with the capability to manufacture components with tolerances beyond what our own QC department was able to measure. Depending on the complexity of your requirements, this phase can take months and requires travel to candidate sites to audit capabilities and access the flexibility of their organization. Typically, the virtues which brought you to the site were provided by sales and marketing types whose vision of the company exceeds their abilities. Once you sit at the table with those in the know, you quickly learn not only are they not able to provide what you need, they do not have an interest in pursuing it, much to the chagrin of the sales and marketing types.
Eventually you find an organization smaller by magnitudes than your own, led by someone not interested in the status quo who is willing to bend their organization to meet your needs. Often a local vendor is chosen to ensure communication can be instantaneous across all the disciplines involved from engineering to supply chain. The challenge comes at a high price but by now you understand the audience for your needs are very, very small. Initial sample orders are placed and the good suppliers provide the specifications you require, not always in the time line you hoped but they get there. You suspect for every piece you receive, hundreds have been tossed. Gradually trust is built, a relationship is developed and product flows. The effect on their organization is palpable. You are pulling them by their collar up multiple levels of development. Their processes improve, personnel gain knowledge and equipment is updated.
It may seem like a recipe for success for both parties but there are also risks.
Care needs to be taken they don’t become too dependent on you. Markets change and products wane and if you represent more than 30% of their sales, you run the risk of doing terminal damage when orders are delayed or stopped. As well, pressure from your own management to find alternate sources for risk aversion or cost reduction is inevitable. Even if someone, typically engineering, has let it slip they are the single source and may have added theirs is the only company in the world capable of producing what you want, you still have leverage. Armed with the knowledge gained from your current source, you engage in further investigations which at the least provide you the ammunition for cost reductions.
On the other side of the table, the desire to improve the capabilities of your organization needs to be a driving force. If a company is lucky, it will happen upon a more technically advanced benefactor willing and patient enough to help them increase your capabilities to a level you would never achieve on your own. But the dance looks quite different from the supplier’s side. After an initial contact, a representative from a larger company arrives and after looking suitably unimpressed with the tour, sets out a list of seemingly impossible objectives they would like to meet in an outrageously short time. Even if business is good, you need to consider the opportunity. Few businesses have the luxury of dependable markets which never wane. What you really need to make it work are the right people. Processes can be developed, equipment purchased but without the right people success is unlikely and your potential customer knows it as well.
Single source customers represent a number of issues for a small business. Often they can be the difference between breaking even and making a profit. It is generally understood pricing needs to be set at what the market will bear; but, charge a single source customer too much and you have created a budget for someone to redesign PCB requirements, find a competitor, or worse replace you. The challenge as well is to ensure the company which represents up to 30% of your income doesn’t demand more than the same percentage of your resources. Losing other customers due to neglect will only increase your reliance and vulnerability on a major customer.
Even when both parties are eager to make the relationship work, there are risks. We once single sourced a CNC machining company on the other side of the continent. Product flowed freely until the ice storm of ’98 brought our production to its knees and redoubled our commitment to find local suppliers.
Single sourcing can be very successful but it requires a supplier who doesn’t get too greedy, a customer who doesn’t get too needy and just a little bit of luck.