- November 12, 2021
Single Source vs. Sole Source Contracts
One of the most crucial parts of a healthy supply chain is having the right vendors and suppliers. Getting them on board, however, can be a difficult balancing act. Your vendors must deliver quality raw materials and services on time, every time. But at the same time, you need to make sure you’re getting the best possible deal to maximize your profits.
When it comes to sourcing vendors, there are two common ways you can do it – sole source or single-source procurement. Depending on the nature of your business and the market you operate within, you might be inclined towards one over the other.
Here’s the difference between these two methods.
Single Source Contract Elements
A single source contract is when your company gets products, raw materials, or services from only one supplier, even if you have other options. For example, a computer manufacturer might decide to buy processors exclusively from AMD, even if Intel also offers a viable alternative.
The sourcing process starts by evaluating all possible vendors that can supply the product or service that a company needs. Depending on the company’s price and quality requirements, a few suppliers might make the cut. Companies will often ask suppliers to make a proposal bid and choose the best among them to get the lowest possible price.
However, suppose the company already has a supplier in mind and knows that no other competitors can match its quality or price. In that case, it can bypass the lengthy bidding process and go directly with the chosen supplier. This is a single-source procurement.
Supplier quality and low price are often the deciding factors for going through the single source supply method, but not always. Sometimes, a company will go with a particular vendor if they have relevant industry experience or have already worked with them in the past.
Benefits of Single Source Contracts
A single source contract guarantees that the company gets the best product or service at the lowest price. Because each vendor went through a thorough vetting process, there’s a good chance that the company will get the best deal.
Single source procurement also gives companies more room to negotiate the terms in their favor because they always have the element of choice. And more than anything else, the choice is the number one advantage that a single source contract gives. If they don’t like the deal, they can always move on to the next supplier.
Sole Source Contract Elements
In a sole source contract, the company gets products or services from only one supplier because they don’t have any other choice. Often, the sole source provider has a monopoly over a product or is the only vendor left supplying an old or outdated material.
Sole suppliers are usually the case with manufacturers that require specialized parts. Take an automobile company, for example, that uses a custom-designed spark plug that they’ve outsourced to a third party for the past 20 years. That’s an example of a sole source vendor because chances are, no other supplier can supply the same part in a timely or cost-efficient manner.
Benefits of Sole Source Contracts
Sole source procurement greatly simplifies a company’s sourcing operations.
Evaluating several vendors and negotiating with each one is a time-consuming process. Working and maintaining relationships with several suppliers can also complicate your supply chain, which often requires investing in technology and staffing to manage them effectively.
When you work with a single vendor, you don’t need to spend as much time haggling costs, delivery, and payment. Unfortunately, this is also the most significant caveat with sole-source vendors.
Because you don’t have other options, you have to do business with sole suppliers even if it costs you more. It’s also harder to replace them if they go out of business or suffer a disruption, which will cause a major problem with your supply chain.
The key with sole-source vendors is to establish a strong partnership with them. Some companies even go as far as acquiring these suppliers to ensure the stability of their supply chain.
Single Source vs. Sole Source Contracts: What’s the Difference?
The main difference between single-source vs. sole-source contracts is the element of choice – and who has it.
In single-source contracts, the choice lies with the company. That gives them the power and leverage to get the best and cheapest vendor possible. If things go awry, they can easily replace them.
With sole-source contracts, the choice is with the vendor. It gives them the freedom to set pricing, delivery schedules, and other favorable terms. While most companies wouldn’t want this arrangement, it isn’t always a choice for them.
Regardless of whether you choose a single-sourcing procurement or sole-source contract, it’s crucial that you have the right tools to manage it. CBX Software offers a robust sourcing platform that allows you to maintain supplier information from one hub. Contact us today and schedule a free demo of our supplier management tools.