Academic journal article SAM Advanced Management Journal

The Hazards of Sole Sourcing Relationships: Challenges, Practices, and Insights

Academic journal article SAM Advanced Management Journal

The Hazards of Sole Sourcing Relationships: Challenges, Practices, and Insights

Article excerpt

To be more competitive and improve responsiveness to customer needs, companies today work with fewer and fewer suppliers--sometimes sole-sourcing a particular input. By examining a particular case of sole-sourcing, the authors highlight potential drawbacks even when trust is intact and both parties focus on the long term. A major danger is "boundary drift"--a change or blurring of decision-making realms. This, in turn, can impede a firm's innovation, reduce autonomy, and thwart implementation of new strategic goals. Overall, firms should think twice before sole-sourcing any activity that is crucial to its ability to produce a product or service consistently and profitably.

Introduction

Fueled by advances in information technology, supply chain management has moved from a back office administrative function to a board room imperative. Today, companies work more closely with their suppliers to be more responsive to customers' changing needs and to build competitiveness. Many firms have significantly reduced the number of suppliers they use, sometimes to a single, trusted source to enable tight integration between firms. Operations management scholars continue to examine the effects of tight supplier integration and often point to the positive relationship between integration and performance (Handfield, Ragatz, Peterson, and Monczka, 1999; Kulp, Lee, and Ofek, 2004; Rosenzweig, Roth, and Dean Jr, 2003). With a relationship built on a foundation of trust, single supplier relationships potentially offer many benefits. The buyer and a single supplier can better coordinate shipments and production, share technological knowledge to integrate the input into production, and communicate design changes to mutual benefit. Multiple sourcing, in contrast, may weaken the ties between the firm and its suppliers making communication, control, and standardization more difficult.

Though the potential benefits of single sourcing and tight integration are many, the strategy has its drawbacks. For example, Horwitch and Thietart (1987) uncovered the costs of coordination, compromise, and rigidity that may follow from especially tight firm-supplier relationships. Similarly, Das (2006) argued that the increased virtual span of control stemming from tight integration may lead to coordination costs that offset savings incurred from single-sourced relationships. In addition to the explicit costs of integration, Sorenson (2003) focused on other costs of tight integration that were less measurable, such as the absence of learning that may come from limiting a firm's contact with its external environment. Clearly, management scholars disagree about the utility of developing tight firm-supplier relationships, such as those that might arise from sole sourcing strategies.

Against this backdrop, this paper offers two core contributions. First, while grounded in a real life case study of a large consumer products company, it offers a theoretical explanation of the perils of single-sourcing relationships. In doing so, it shows the actual drivers of boundary drift, a term we develop to represent the change in organizational boundaries that result from sourcing decisions. Furthermore, we show how such a phenomenon can lead to unintended, and potentially detrimental, strategic outcomes. Second, by following the focal firm as they design a new sourcing strategy, we offer important insights for practicing managers who might face similar challenges. In the next section, we provide a theoretical explanation of boundary drift including drivers and consequences. We then discuss the methodology that guided this study before applying the theoretical lens to the case and illustrating the six-step process used by the focal firm to re-design their sourcing strategy. We conclude with a summary of contributions, limitations, and opportunities for future research.

Drivers of Boundary Drift: Trust, efficiency, and asset ownership

Governing the single-source relationship Interorganizational relations, including sole-sourcing supplier relationships, are intermediate forms of organizing, resting somewhere between pure markets and pure hierarchies. …

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