Monday, November 01, 2010

The Sole Source vs. Non-Sole Source Cost Indexes

I hope that you have enjoyed the article “More Sole Source Procurement Solutions.”

In the article, I talked about how creating two indexes - one that tracks cost changes in your highest spend sole source items and a second one that tracks cost changes in your highest spend non-sole source items – can help you garner top management support for eradicating sole source situations. In this post, I will provide more details on how to create those indexes.

To create these indexes, start with a list of items that you buy, sorted from highest spend to lowest. Then, eliminate from that list any items that are not frequently and repetitively purchased.

Identify the first ten items on the list that are purchased from a sole source. Determine the average unit price you paid for each of them last year and this year. If you have pricing from prior years for each item, that’s even better. But you need at least this year and last year. Add up those average unit prices for each year as if you bought one unit of each item to come up with a composite value for each year. Then, determine the percentage change from last year’s composite value to this year’s.

Next, identify the first ten items on the list that are purchased from a non-sole source. This doesn’t mean that you bought them from multiple suppliers, only that more than one capable supplier was available. Determine the average unit price you paid for each of those items for each of the years that you tracked for the sole source items. Do the math to come up with a composite value for each year. Then, determine the percentage change from last year’s composite value to this year’s.

If the percentage change in the composite value for sole source items is greater than the percentage change in the composite value for non-sole source items, you can begin to make a business case about how much your organization is penalized for creating sole source situations. Creating a chart showing this trend over several years can provide a very compelling visual tool for communicating how bad sole source situations are.






If you came to this post from the sole source procurement solutions article and want to return to the article, simply click here.


To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
Next Level Purchasing . com

6 comments:

Mohamed said...

Very Nice Article

Charles Dominick, SPSM said...

Thank you, Mohamed!

Tichafa said...

Thats spot on Chas, procurement is about cost cutting and value for money purchasing.

Charles Dominick, SPSM said...

Thank you, Tichafa!

Priyanka said...

Hello Charles,

I found your article really inetersting and educating.

I am working on Sole / Single source business case as how we can manage it better. I work in oil industry.

Could you help me understand as how generally sole / single source suppliers are managed across the companies?

Thanks

Priyanka

Charles Dominick, SPSM said...

Priyanka,
We have several articles covering sole source supplier management. You can find them at http://www.NextLevelPurchasing.com/free.html

ShareThis