A recent article over on CFO by Shawn Casemore, President of Casemore & Co, on why you should mend your spend in order to grow, offered up Casemore and Co’s four crucial steps to building a big-business attitude. Step two, which stated that the procurement department is not the place for monogamy, caught my attention because sometimes “monogamy” is needed for successful procurement.
According to Shawn:
Human nature has demonstrated that the longer we remain in a stable relationship, the less effort we place into maintaining or improving the relationship. In a supplier-to-customer relationship, this tendency is often substantiated through escalating prices and diminishing customer service over time.
As an example, he gives the anecdote of when he worked with an organization that used a sole transportation source for all of its inbound and outbound freight needs — remnants of its early days when it was a small business. The prices offered by the carrier had been steadily climbing, and freight damage was quite prevalent. Despite those problems, the company president was hesitant to change. But when they moved the business away from the incumbent and divided it between two alternative carriers, service levels improved and the firm reduced overall transportation costs by nearly 10% per year.
And this is a common story among consultant firms that specialize in transportation / logistics / 3PL cost reduction. Competition is good for the corporate coffers. And in this situation, a secondary source of supply can mitigate risks and increase competition.
But this isn’t always the case. If you need a specialized widget, or microprocessor, and you split the award, you drive up costs as setup costs, which often involve new equipment purchases, for production of a new, customized, product are high — and you’re paying them twice and information protection and losses due to IP theft — as there are two routes IP thieves can take to steal your IP and produce black-market copy-cat products — are higher.
In other words, competition is great when you have a tactical category where there are lots of low-risk, high quality suppliers to compete for your business, but if you have a strategic category where there are few high-quality suppliers and set-up costs are high, sole-source (with production distributed at geographically dispersed plants) might be the way to go.