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?    

Soheila Lunney

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