Page 211 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes
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Caution In a single sourcing relationship, all suppliers are treated equally, whether they
are internal or external.

Suppliers set their own goals and evaluate their own performance. The company monitors their
goals and encourages them continually to improve their performance. Where it feels the goals
are too low, the company provides support for process and operations improvement.
Orders are understood to be placed at current prices and there are no annual price re-negotiations.
Company and suppliers constantly work together to reduce the cost of purchased materials.
Using this approach, most companies are able to cut material costs significantly. Suppliers are
expected to make up for any increases in the cost of raw materials that arise from normal
inflation, but they are compensated for unusual swings in the raw materials market.
Japanese just-in-time (JIT) philosophy, which has been growing in popularity, has also played a
major part on giving this concept the legitimacy it needed. The central idea of JIT is to eliminate
waste and to emphasize value added activities. This also involves reducing the number of
suppliers a firm does business with. The purchasing objectives have a focus to consolidate a
partnership or alliance with the supplier.
Relationships built on trust and mutual understandings have allowed companies to simplify
their contracts to straightforward two to three-page agreements. That the supplier has the part
for the life of the product is understood. However, developing this type of relationship generally
takes a five to eight-year effort for both parties. The best place to start is with A category
products (ABC analysis), as these tend to provide the greatest initial benefits.

Once the company outsources a part, its supplier keeps the part for life unless a quality or
delivery problem arises. Eliminating redundancy reduces overall costs, cutting out dual sourcing,
dual tooling, and dual process development.

Single sourcing is preferred as the purchasing method, when the strategic emphasis is on the
supplier’s availability of technical support, the reliability of the product, and the total cost of the
product. As companies gain experience with single-sourcing, they tend to move beyond individual
parts to entire part families, further reducing the complexity of supplier management.
Successful day-to-day collaboration between a company and its suppliers relies on supplier
evaluation, investment for improvement, integration of suppliers, effective use of transportation,
and open communication.

Table 10.1: Advantages and Disadvantages of Single Sourcing
Buyers' perspective
1. Improved communication from the close 1. A strike or a production resulted
buyer-seller relationship disruption could cause major difficulties
2. To cooperatively design quality system 2. The absence of bargaining control power a
and to share quality output data buyer has in dealing with a single source
3. Lower price stemmed from reduction of 3. The relationship must be a genuine
costs in ordering, shipping, and material cooperation
handling
4. Improved stability for both parties

Vendor's perspective
1. Quality considerations 1. Without competition the vendor may
2. Cost considerations attempt to cut costs
3. Dependability 2. Vendor needs to exercise great care
4. Flexibility of reacting to demand and when negotiating a contract
environmental changes

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