Dangers on the Components Sourcing Highway

Based on some of the replies to my blogs and conversations with customers, I have noticed that some individuals are confused over single and sole sourcing. I will start with definitions and then share some observations and thoughts on the subject. (See: Single Source Premium: Unnecessary Cost and Purchasing: Risks in 'Virtual' Second Sources.)

Sole sourced: A component where there is only one manufacturer capable of making it.

Single sourced: A component that has more than one manufacturer able to make it but for which you have qualified only one source for your application.

I use the term manufacturer in my definitions because there are situations where companies believe they have multiple sources of supply but are really only single or sole sourced. For security of supply reasons, you want to ensure that a single point of failure cannot disrupt your ability to make and sell products. A fire in a factory, major earthquake, or strike could cause significant supply disruptions, if any of your components come from only one factory, in one region, with a common labor pool.

Many companies feel they are multi-sourced when their approved list of vendors for a component includes the manufacturer along with one or more distributors as the source of supply. By my definition, this is risky because they remain single or sole sourced, and, with the low levels of inventory held by distributors today, they are vulnerable. For single sourced components, you want to establish true alternate manufacturing sources, and for sole sourced components, you want to understand the security of supply measures taken by the sole source manufacturer to ensure no single points of failure exist.

Sole sourced components are usually devices that contain a significant amount of intellectual property and, once selected in a design application, cannot be replaced or substituted without a significant amount of engineering and redevelopment. FPGAs and telecom chips fall into this category. With this class of components, pricing is often decided during the design cycle, and once the design award has been made, it is difficult to achieve cost reduction.

Often associated with these parts is a process called registration. Registration sets a minimum price for a component through a specific channel to a customer, which means that the part will be more expensive through any other channel than the registered one. The registered channel is the representative or distributor that provided engineering services to the customer, and registration is the means of tracking the commissions to that representative or ensuring that distributor gets the business. Registered pricing is often misunderstood by the customer. Registration establishes the minimum price to customers, not the minimum price to the market.

Single-sourcing is an unnecessary disaster waiting to happen. Along with true single sourced devices, there are what I refer to as weak single sources. Both need to, and can, be eliminated. Here is my shortlist of what to look for on your approved manufacturers or vendors list. Seek approved vendors list (AVL) or approved materials list (AML) alternatives for any component that:

• Shows only one specified part.
• Is from only one manufacturer. (Sometimes a high-risk and expensive practice of specifying tighter tolerance components as alternatives is used.)
• Lists distributors as second sources.
• Shows an end-of-life component as an alternative.

Make sure that you have price quotations from all alternative suppliers to confirm that the alternate source is commercially acceptable. An alternative at three times the price or more is not a true alternative.