Sole sourcing is one of many important issues Material Planners struggle. The primary question is how do I mitigate risk and lower inventory when using a sole supplier? The short answer is you cannot. The lower the inventory in the value stream the higher the risk. The definition of a sole supplier in regard to this article is as follows.
Suppliers that provide a product or service in which you’re contractually obligated to use or there is no other source of supply. The risk of delivery disruption due to finances, natural disaster, material shortage or any other reason could cripple your production lines for long periods.
Contractually obligated – There are times a customer requires use of specific supplier. The best method to mitigate risk in this instance is in the T&C with your customer. If you need to carry extra inventory to reduce risk the customer should share in that expense. You could also agree upon a back up source in advance. Include language that will allow your organization to pass on price escalation if their preferred source price increases.
One Source of Supply – The supplier might have proprietary rights to the patent or process for the item or service. All efforts should be made to avoid these items in your bill of material (BOM) during the design phase of your product. That being said there are times when the benefit or need outweighs the risk. In this instance be sure to obtain a risk-mitigating plan from the supplier. Do they have multiple manufacturing facilities? Would the supplier be willing to license and outsource their product or service in an emergency?
The level of total inventory in the value stream of a sole source item should be higher than its counterparts. If you’re an exceptionally large organization you can possibly have the supplier hold the excess. Regardless of were held it will be needed to reduce risk.
This risk should be identified and quantified during the sales and operation-planning (S&OP) phase, not at purchase order entry. Don’t get soles sourcing confused with single sourcing. Single sourcing is done by choice. There are alternate suppliers to use when single sourcing.
The role of lean is to remove waste an inefficiencies from a value stream. Please remember lean tools are there to guide not to rule. We humans still have the ultimate job of using the tools along with common sense to access risk and reward.