Single sourcing in a Lean environment
How do I mitigate risk and lower inventory when using a single vendor? This is the circular argument between production and finance in virtually all manufacturing companies. The short answer is that you can’t.
Reducing inventory levels while single sourcing is much riskier than using single or multi-source suppliers. The definition of a single source supplier should highlight the need to carry additional inventory along the value stream.
single source – Suppliers who provide a product or service that you are contractually obligated to use or there is no other source of supply.
The risk of delivery disruption due to finances, natural disasters, material shortages, or any other reason could bring your production lines to a standstill for long periods. Let’s explore the two main drivers for single sourcing, contractually bound and a source of supply.
contractually bound – There are times when a client requires the use of a specific provider. The best method to mitigate the risk in this case is in the T&C with your client. If the amount of additional inventory required is excessive, the customer must share that expense. You can also agree and prepare a backup supply source in advance. Include language that allows your organization to convey price escalation if the price of your mandatory supply source increases.
a source of supply – The provider has property rights over the patent or the process for the item or services that are contracted. Efforts should be made to avoid these items on your Bill of Materials (BOM) during the design phase of your product. That being said, there are times when the benefit or need outweighs the risk. In this case, be sure to obtain a risk mitigation plan from the vendor. Do you have multiple manufacturing facilities? Would the provider be willing to license and subcontract their product or service in an emergency?
The total inventory level in the value stream of a single-source item must be higher than its counterparts. If you are an exceptionally large organization, you can have the supplier keep the surplus. Regardless of where it is held, excess inventory will be necessary to reduce risk.
This risk should be identified and quantified during the sales and operations planning (S&OP) phase, not at purchase order entry. Do not confuse single sourcing with single sourcing. Single sourcing is done by choice and there are alternative sources of supply available in the market.
Lean’s role is to remove waste and inefficiencies from a value stream. Remember that Lean tools are there to guide, not rule. We humans still have the final job of using the tools along with common sense to access risk and reward.