Sole sourcing explained

Significant weaknesses in worldwide supply chains were made clear in recent years. From COVID-19 lockdowns to ongoing geopolitical conflicts, and from semiconductor shortages to raw material price shocks, the pressure on procurement teams has intensified. According to a 2024 McKinsey survey, nearly 75% of supply chain leaders reported facing significant disruptions that forced them to rethink supplier dependency models.

In this high-stakes environment, companies are being asked tough questions:

⇒  Are we too reliant on a single source?

⇒  Is resilience being sacrificed for efficiency?

⇒  How quickly can we adapt if our key supplier fails?

These are not just theoretical risks; real-world examples have shown how sole sourcing can either become a competitive advantage or a critical point of failure.

Social Proof: In 2021, Toyota, a company often praised for its just-in-time (JIT) efficiency, had to halt production at 14 plants due to supply shortages tied to sole-sourced components. This disruption cost the company billions in output and highlighted the fine line between lean operations and over-dependence.

When a company depends on a single supplier, it's optimizing for speed, simplicity, and tight alignment. Procurement cycles are streamlined, communication lines are clear, and often, costs and lead times shrink.

What is the meaning of sole source?

Sole sourcing is a procurement method where a company chooses to buy a product or service from only one supplier, even if other options exist. This is often done due to the supplier’s unique capabilities, specialized products, or long-standing relationships.

What is an example of a sole source

Example of sole sourcing:

Imagine a government agency needs a specific type of software that only one company in the country develops and maintains. Since no other supplier offers the same software or expertise, the agency purchases it directly from that company without going through a competitive bidding process. This is a classic case of sole sourcing, buying from the only available or qualified provider.

When to use a sole source

Sole sourcing is typically used when:

1. Only one supplier exists: The product or service is unique, and no other vendors can provide it.

2. Urgency or Emergency: There’s no time for a competitive process due to urgent needs.

3. Proprietary technology or IP: The supplier owns exclusive rights to the product or system.

4. Long-term relationships: The buyer relies on a trusted vendor for consistency or quality.

5. Compatibility requirements: The new purchase must work with existing systems from the same supplier.

How sole sourcing works in procurement

Sole sourcing in procurement refers to the process of acquiring goods or services from a single supplier without conducting a competitive bidding process. Although this approach bypasses competition, it is still governed by structured internal controls to ensure transparency, compliance, and value for money.

While often used in specific or exceptional circumstances, sole sourcing must be handled with careful scrutiny. The process includes several formal steps to ensure that the decision is justified, properly documented, and aligned with organizational procurement policies.

1. Identifying the need

The process begins with a clear definition of the requirement. The requesting department identifies a specific need that, based on their initial assessment, may be met by only one supplier. This could be due to technical specifications, proprietary technology, compatibility with existing systems, or urgent operational demands.

2. Conducting market research

Before proceeding, procurement teams are responsible for conducting thorough market research to verify whether the product or service is truly available from only one source. This step helps rule out the presence of alternative suppliers and ensures that the sole source claim is valid. Market analysis may include reviewing supplier databases, past procurement records, and consulting industry experts.

3. Preparing the sole source justification

If the research supports a sole source approach, the next step is to draft a formal Sole Source Justification (SSJ) document. This is an essential step in the procedure that needs to be stated explicitly:

⇒  The nature of the goods or services required

⇒  The rationale for selecting the specific supplier

⇒  Evidence that no suitable alternatives exist

⇒  An assessment of the supplier’s qualifications and capabilities

⇒  The estimated cost and budget implications

⇒  Risks associated with proceeding or not proceeding with the procurement

This document serves as the foundation for internal review and audit readiness.

4. Internal review and approvals

The justification is then submitted for internal review by relevant stakeholders, which may include the procurement department, legal counsel, compliance officers, finance, and executive management. The value and sensitivity of the procurement may require further clearance levels.

Approval ensures that the procurement:

•  Complies with internal policies and external regulations

•  Is justified based on available evidence

•  Corresponds with the organization's willingness to take risks and purchasing goals

5. Supplier negotiation

Once approvals are obtained, the procurement team enters into direct negotiations with the sole supplier. Since there is no competition to influence pricing or terms, the procurement team must use benchmarking, cost analysis, and due diligence to ensure fair pricing and favorable contract terms.

Negotiation topics typically include:

⇒  Unit pricing and total cost

⇒  Delivery schedules

⇒  Warranty and support

⇒  Service level agreements (SLAs)

⇒  Penalties or remedies for non-performance

6. Contract development and execution

Following successful negotiations, a formal contract is drafted and executed. This contract should reflect all agreed-upon terms and protect the organization’s interests. Proper documentation is essential at this stage to ensure compliance with internal policies and external auditing requirements.

The reasoning, market analysis, internal approvals, and definitive transaction, among other papers pertaining to the only source of procurement, must all be methodically preserved.

7. Ongoing monitoring and evaluation

Procurement does not end at contract signing. The supplier’s performance is monitored continuously to ensure that the deliverables meet agreed specifications, timelines, and service standards. In many organizations, performance metrics are tracked, and the supplier relationship is reviewed periodically to confirm continued value.

Advantages of sole sourcing

1. Streamlined procurement process

One of the main advantages of sole sourcing is that it can speed up the procurement process. Traditional competitive bidding processes require extensive time and resources to draft requests for proposals (RFPs), advertise opportunities, solicit bids, conduct evaluations, and negotiate with multiple suppliers. Sole sourcing bypasses many of these steps by directly engaging the chosen supplier, significantly reducing administrative burdens and allowing organizations to secure the required goods or services more quickly.

This is especially valuable in situations where timing is critical, such as in emergency repairs or urgent operational requirements, where delays could lead to financial loss, service interruptions, or safety hazards.

2. Stronger supplier relationships

A more cooperative and trustworthy connection between the customer and supplier is frequently the result of sole sourcing. By consistently working with the same supplier over time, organizations develop a deeper understanding of each other’s expectations, processes, and standards. This ongoing partnership can foster open communication, quicker problem resolution, and tailored solutions that better meet the organization's unique needs.

Moreover, suppliers may be more inclined to prioritize clients with whom they have long-standing relationships, offering preferential pricing, customized service packages, or early access to innovations and upgrades.

3. Consistency and Compatibility

When products or services must integrate seamlessly with existing infrastructure, consistency becomes crucial. Using the same supplier helps ensure that all components conform to the required specifications and standards, reducing the risk of incompatibility that can cause system failures or operational inefficiencies.

For example, in industries such as IT, manufacturing, or healthcare, where equipment or software must align with legacy systems or proprietary designs, sole sourcing guarantees that new acquisitions will be fully compatible and maintain system integrity.

4. Access to proprietary or Specialized products

Certain products or services are exclusive to specific suppliers due to intellectual property rights, patents, or unique expertise. In these cases, competitive bidding is not an option because alternative providers simply do not exist or cannot legally supply the item.

Sole sourcing in these contexts ensures that organizations can obtain the specialized goods or services they require without compromising on quality or functionality. It also enables direct communication with the source, which can be crucial for technical support, customization, and future upgrades.

5. Improved quality control

Managing quality becomes more straightforward when dealing with a single supplier. With only one vendor responsible for delivering goods or services, procurement and quality assurance teams can focus their resources and monitoring efforts more effectively.

This simplifies tracking performance metrics, managing defects or non-conformities, and maintaining compliance with industry standards or regulatory requirements. Additionally, a sole supplier has a clearer understanding of the buyer’s quality expectations, which can lead to more consistent and reliable outcomes.

6. Reduced administrative costs

Competitive procurement processes typically involve significant administrative expenses, including preparing detailed procurement documentation, organizing evaluation committees, and managing communications with multiple suppliers. Sole sourcing reduces these costs by limiting procurement activities to one supplier and eliminating the need for comparative evaluations and multiple rounds of negotiations.

This reduction in administrative overhead allows procurement professionals to allocate their time and resources to other strategic tasks, improving overall organizational efficiency.

7. Enhanced supplier commitment

A sole source supplier often perceives the relationship as strategic and may be more willing to invest resources, personnel, and attention to support the buyer. This increased commitment can translate into better service levels, faster response times, and greater flexibility to accommodate changes in requirements or unexpected challenges.

Such suppliers are also more likely to collaborate on innovation initiatives or customized solutions, helping the buyer gain competitive advantages or operational efficiencies.

Sole sourcing vs. single sourcing: What is the difference?

Sole sourcing is inevitable if you have no other options for suppliers, but it must be done carefully. If you have alternatives and want to optimize costs, service, and innovation through partnership, single sourcing is generally the better approach.

In practice, organizations often use a combination of both strategies depending on the product, market conditions, and operational priorities.

Best practices for businesses considering sole sourcing

1. Conduct comprehensive market research

Before deciding on sole sourcing, perform thorough market research to confirm that no alternative suppliers can meet the requirements. This includes:

⇒  Checking supplier databases and directories

⇒  Consulting industry experts or associations

⇒  Reviewing recent procurement records and market reports

⇒  Documenting all findings clearly

This step is critical to avoid unnecessary sole sourcing and to demonstrate due diligence.

2. Prepare a clear and Detailed sole source justification

Create an official Sole Source Justification document that provides the following explanations:

⇒  The particular requirement for the good or service

⇒  Why could just one provider meet that requirement?

⇒  The consequences of choosing not to use the solitary source option

⇒  Cost estimates and budget considerations

⇒  Risk assessment and mitigation plans

This document should be factual, objective, and supported by evidence to withstand internal and external audits.

3. Obtain proper internal approvals

Ensure that the sole sourcing decision undergoes appropriate levels of internal review and authorization. This typically involves:

⇒  Procurement department validation

⇒  Legal and compliance reviews

⇒  Financial approvals from budgeting authorities

⇒  Executive or board-level sign-off for high-value contracts

Several levels of approval improve governance and transparency.

4. Engage in rigorous price and Contract negotiations

Since pricing is not dependent on rivals, it is essential to engage in firm negotiations to obtain fair and acceptable conditions. Key negotiation points include:

⇒  Price benchmarking against historical or industry standards

⇒  Delivery timelines and penalties for delays

⇒  Warranty, service, and support agreements

⇒  Payment terms and conditions

⇒  Termination clauses and remedies for non-performance

Strong negotiation safeguards the organization’s interests.

5. Maintain transparent and Complete documentation

Keep all procurement records organized and accessible, including:

⇒  Market research reports

⇒  Sole source justification forms

⇒  Internal approval memos

⇒  Contracts and correspondence with the supplier

Comprehensive documentation supports accountability and helps in audits or regulatory reviews.

6. Monitor supplier performance continuously

Post-contract award, regularly evaluate supplier performance against agreed terms and service levels. This includes:

⇒  Tracking delivery schedules and quality standards

⇒  Managing service-level agreements (SLAs)

⇒  Conducting periodic performance reviews and audits

⇒  Addressing issues promptly and enforcing contract remedies if necessary

Effective monitoring ensures value delivery and mitigates risks.

7. Review and Reassess sole source arrangements periodically

Sole sourcing decisions should not be static. Regularly reassess whether the sole source status remains valid by:

⇒  Monitoring market changes and new entrants

⇒  Evaluating technological developments that might introduce alternatives

⇒  Reviewing supplier performance and cost-effectiveness

If alternatives emerge or conditions change, consider transitioning to competitive or single sourcing strategies.

8. Implement risk mitigation strategies

Recognize and prepare for risks inherent in sole sourcing, such as supplier failure, price escalation, or supply chain disruption. Mitigation measures may include:

⇒  Establishing contingency plans or backup suppliers where possible

⇒  Negotiating contractual safeguards

⇒  Building inventory buffers for critical items

⇒  Ensuring insurance or liability protections

Proactive risk management protects business continuity.

Conclusion

Sole sourcing isn’t inherently risky or inherently smart; it’s context-dependent. In markets reshaped by pandemics, geopolitics, and component shortages, overreliance on a single supplier can become a critical point of failure, yet the very same focus can deliver speed, tighter alignment, and access to unique capabilities. The difference lies in discipline: treat sole sourcing as a governed exception, not a casual shortcut.

Use a clear Sole Source Justification(SSJ), prove the market truly lacks alternatives, and route the decision through legal, compliance, finance, and executive approvals. Then negotiate hard with benchmarking, codify SLAs and remedies, and rigorously monitor delivery, quality, and cost performance. Reassess regularly, conditions change, new entrants emerge, and today’s sole scenario can become tomorrow’s competitive event. Build contingency plans, inventory buffers for critical items, and contractual safeguards so a disruption at one supplier doesn’t become a disruption for your business.