Does single source supply give customers leverage?

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Single Source Supply.jpgDuring the Apartheid era, organisations often grew by purchasing or amalgamating with their competitors. As a result, in the 1990s, when organisations had access to the world stage, South Africa had and still has many industries that are controlled by monopolies or duopolies.


Whilst most organisations believe that increased competition amongst their suppliers to be a ‘good thing’, few seem to take advantage of this in practice. Many organisations seem to be locked into believing that volume and price go hand-in-hand, and many actively work at having single source supply arrangements, often under the epithet ‘supplier partnerships’. “Whilst Purchasing Index (PI) has no doubt that successful supplier partnerships do exist, they remain, in our opinion, very few and far between. Living the reality of a supplier-customer partnership requires a lot of research, set-up, information, ongoing management and commitment to make it sustainable”, Alan Low, Managing Director of Purchasing Index, told SmartProcurement.

“PI has much empirical evidence to the effect that small customers often get lower prices and better service from suppliers than their much larger peers. Below is an example from 2005 which shows eleven organisations who were buying the same popular, branded HP inkjet cartridge. An organisation buying 130 cartridges per month was paying R20 less than another organisation buying 200 cartridges a month”, Low continued.
 

Ink Cartridge spreadsheet.jpg


In fact, PI also has evidence that where organisations move from a competitive supply environment to single source supply, they often find that the products they buy become relatively more expensive (and the service deteriorates).

The graph below shows what happened to a large organisation’s price for desktop personal computers after the organisation had abandoned regular competitive bidding for their supply and moved to a sole supplier:

 

Mainstream Desktop PC Prices – Client vs. IndexMainstream Desktop PC Prices.png

The above shows that the client’s price differential has worsened from just under R1,000 in October 2006 to more than R2,000 in February 2008.

Is it then not easier for Procurement to give their internal customers a choice? Might this not help to increase internal compliance? Would this not help to ensure that prices and services remained competitive? Of course, it is easier for Procurement to set up a single contract (much less admin, etc), but having ongoing competition should allow organisations greater price / service sustainability.

“Sustainability is one of the key issues for organisations. Procurement must thus ensure that the competitive deals that they put in place remain competitive. Suppliers price their products and services competitively and opportunistically. The less real competition they have in a particular customer the less they need to worry about pricing aggressively.

Suppliers will, in these situations, look to maximise the returns for their shareholders and therefore customers must beware!”, Low concluded.

 

If you are interested in participating in any (or all) of the above please contact Alan Low on 011 803 0005 or 084 890 0005. Alternatively email alan@pibenchmark.co.za

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