How To Negotiate With Sole Sources

By Soheila Lunney

May 09, 2011 at 9:19 AM

Frequently, I get asked this question: “How do you negotiate with Single/Sole source suppliers?”

The answer to this question requires differentiating between these two types of suppliers and providing a definition for each: 

  • Single Source. Multiple options are available but buying organization chooses to contract with one supplier.
  •  Sole Source. There are no alternatives – a sole source supplier is the only source for the product, material, or service that buying organization needs to purchase. 

In the case of Single source, since there are choices and multiple organizations have the capability to provide the desired product or service, the buying organization has the opportunity to use the principles of strategic sourcing process, bid competitively, negotiate, and select the supplier that offers best overall value or Total Cost of Ownership (TCO) for the organization.

Sole source situations, however, are more complicated to deal with and negotiate. So, how do you increase your negotiation power when dealing with Sole source suppliers? To build a more powerful negotiation position, buyers need to:

  • Estimate both parties’ needs in the negotiation and trade on interests that both parties value differently. Identify how costly is for the supplier to lose you as a customer.
  • Estimate supplier consequence of No Agreement. Determine the short- and long-term impact and costs to the supplier for not reaching an agreement.
  • Use leverage of a long term contract.
  • Leverage company-wide spend. Most monopoly suppliers sell (or have the potential to sell) other products to your organization for which alternate suppliers exist.
  • Explore segmentation approach. Present the idea of competitively bidding part of your requirements (e.g., service/maintenance agreements when leasing or purchasing computers can be segregated for bidding competitively). 

Often, Sole source situations are the result of internal stakeholders (e.g. engineers or chemists) specify special or new requirements (specifications) for a product or service from a specific supplier. Once this occurs, it will become very difficult for the procurement department, which was excluded from the process of developing specifications, to make the change. As a result, preventing sole source situations from happening in the first place, require raising awareness, coordination, and cooperation among various functions within an organization.  

Does your procurement organization take the proactive approach in educating your stakeholders (upper level management to technical staff) about the consequences of not including procurement in the early stages of product development and specification preparation?    

 



Tags: Strategic sourcing Procurement Sole source Single source
Category: Blog Post

Soheila Lunney

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Dr. Soheila R. Lunney, is the President of Lunney Advisory Group LLC, and co-author of the book “The Procurement Game Plan: Winning Strategies & Techniques For Supply Management Professionals.” She has over 25 years of supply management, procurement, and business experience, involving both domestic and international (Far East, Europe and Russia) activities. She has extensive experience in consulting, coaching and training in supply management, procurement, reengineering the supply management process, the management of procurement function, sourcing of materials and services, reducing total cost of ownership, and negotiation of complex contracts. 

Prior to founding Lunney Advisory Group in 2007, Dr. Lunney joined Education Management Corporation (EDMC) as the Vice President of Procurement in January of 2004. Prior to joining EDMC, she was the Director/Deputy to the Chief Procurement Officer at Bayer Corporation. During her 17 years of service at Bayer, she held several positions with increasing responsibilities in Research and Development, Logistics, Customer Services, Materials Management, and Procurement.

Dr. Lunney obtained her Bachelor's Degree in Science from National University of Iran followed by M.S. and Ph.D. from University of East Anglia in Norwich, England. 

Dr. Lunney served as a member of the Board of Directors of Pittsburgh Institute for Supply Chain Management (ISM) from 2005 through 2011 and also on the Board of Directors of EDMC Foundation and Pittsburgh Regional Minority Purchasing Council. In addition, since 1999, she has been a member of the Advisory Board of Supply Chain Management at Duquesne University in Pittsburgh where she taught a course in Procurement/Supply Chain Management in the evenings.  Dr.. Lunney is a frequent speaker on different Supply Chain Management topics at professional organizations such as ISM (different affiliates), Lawson annual CUE Conference, Puridiom Conference, SPI annual Conference and is a sole holder of a U.S. Patent relevant to Polyurethane Technology and author of several publications.

Contact Dr. Lunney by email at soheila@lunneyadvisorygroup.com 


Please add a comment

Posted by Sheldon Martinez on
I look at the problem first with how purchasing is integrated in the company. At my company, purchasing is in maybe %50 on the decision making when it comes to raw materials. That number is too low and it has slowly changed over the years. Not by much but the idea is there that purchasing must be involved from start to finish. I have seen the problem brought on by engineers not knowing the market and singling out a raw material before researching the availability. This must start at the top. If not you could spent months of planning to only find that half the products suggested are a single or sole source and the manufacture produces it seasonally. I have seen it happen, and it is a waste of company resources.
Now as for dealing with single and sole source items, you first do your home work. As for a single source, you have options. You have the room to negotiate and can be firm on some options with out the fear of not being able to obtain product. Sole source can be tricky but it involves a lot of home work and digging. This includes knowing what exact raw material go into producing and the machine time it took to produce the raw material. Guesstimating is better than not knowing. It can be a game changer when you know these key points. It also depends on the relationship between your two companies. You must be able balance a relationship that can some times can become heated. Knowing the person or persons you are dealing with plays a big role also. Again doing your home work before hand can make or break a negotiation.
Posted by Soheila Lunney on
Sheldon
You are right in that many organizations are at the infancy of involving Procurement in the early stages of product development. Not only members of the procurement department need to raise awareness among the stakeholders, more importantly, members of the top level management team need to support and promote procurement's involvement in soucring process starting with specification development all the way through the supplier selection, negotiations, and supplier relationships management.

Top level management, in any organization, is the key to the success of the procurement department. This topic, by itself, grants a Blog at a later date.
Posted by Muhammad Rizwan on
Attention: Soheila Lunney

Dear Ms. Lunney
I am Muhammad Rizwan, Procurement / Materials Engineer in Pak-Arab Refinery Limited (PARCO).

In Refineries / Petrochemical Plants, almost every installed equipment / machinery are proprietary (sole source) in nature. While purchasing their spares / internal parts, we are bound to procure them from their manufacturers as their design are unique and none of other manufacturer can produce that part.

In such cases, how the quoted price can be negotiated with the manufacturer.
Posted by Rajeev Phadke on
Hello Mr. Rizwan,

Once you have made the purchase, without providing for future support, you are stuck with a Sole/Single supplier related problems. It is said that in case large equipment, the revenues earned initially are much less as compared to that earned from support, spares and maintenance. It is their typical business model.
Important thing is to include and provide for all the future requirements in the initial purchase agreement and get the supplier's agreement on that, of course at a reasonable cost. At the time initial purchase, you are likely to have luxury of evaluating more than one supplier.
Posted by Muhammad farhan majeef on
Dear sir,

I am working in construction company in Dubai. I am facing the same problem for sole supplier like for ceramic i want to know some details about this pls help me in this situation that how we can deal with the sole supplier in this situation.
Thanks
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