Single Source Situations Shouldn't Stink
PurchTips edition #274
Can You Still Succeed In Single Source Situations?
Conducting competitive bidding for the sole purpose of pressuring the incumbent to lower its price is unethical.
But what if you're in a situation where a powerful internal department will refuse to switch suppliers - irrespective of any potential cost savings and other benefits - and will be supported by senior management?
Well, the first choice should be to build senior management's support for procurement practices that not only uphold proper ethics, but also can contribute to improved financial and operational performance. However, senior management may not immediately support you.
If they don't, that doesn't mean that you have to engage in unethical sourcing practices or be stuck with a single source supplier that will gouge you year after year. Here are three techniques you can use if you find yourself in such a self-imposed single source situation:
- Negotiate. Just because you know you don't have an alternative to switching suppliers doesn't mean that your single source supplier has to know that. Sharpen your negotiation skills, prepare well, and negotiate with your supplier with vigor! Pricing and terms decisions are made by humans and that means that good persuasion techniques can get your supplier to concede even when it isn't logical for them to do so.
- Use a price adjustment clause. Competitive bidding ensures that prices stay in line with the market. But that's not the only method of assuring this result. Agree upon a price adjustment clause with your single source supplier so that pricing in future years will be adjusted in accordance with an objective market index, rather than at the whim of a supplier that knows that it won't be replaced.
- Consider alternatives to fixed pricing. If pricing is based on cost plus a percentage for the single source supplier's profit ("cost plus pricing") instead of a fixed price, it can prevent the supplier from inflating its profits at your expense year after year and "hiding" that fact in a fixed price with no visibility into unreasonably high profit margins.
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