The dangers of single source supply

The trend we see everyday in the labeling and packaging business is the desire to pair down the supplier base- sometimes to a single source of supply. The main argument is that is saves money by giving the buyer a bigger spend (more leverage) with fewer suppliers. It is also believed to make the supply chain easier to manage. Fewer moving parts as the theory goes.

But (and it is a big but), there is a significant downside. With fewer suppliers, there is risk that a “problem” could end up being a catastrophe for the buyer. One of the best examples of this is Lululemon and their single source of the Luon fabric. The company had a quality problem with their fabric from their single source supplier that forced them to do a major recall of their very popular yoga pants.  You may recall that the pants were too thin making it embarrassing for many who were practicing yoga with the Lululemon pants on. The company was forced to do a major recall, but had no other supplier to turn to while the supplier with the problem tried to solve the problem. In the end, they lost their long time CEO Christine Day who had grown the business 5x since she started. They lost 2 billion dollars of market cap on the day Ms. Day resigned.  The end result was a lost CEO, 2 billion dollars of market cap reduction and a blistering in social media that destroyed the image the company spent years earning. All this came from a very lean supply chain!

We’ve seen the same thing in the label business. A number of booklet label buyers in chemical and pharma have  elected to go to single source. The result isn’t quite as dramatic as Lululemon, but we have heard that those companies are getting inconsistent service which means missed deliveries and slower response times. If their single source plant is too busy…well….they just have to wait until there is press time.  That’s no good in today’s fast paced distribution networks. It could also mean something much larger if something happens to the plant like a sale, a fire, a natural disaster, bankruptcy, management change etc.

Smart companies realize that single source is a disaster waiting to happen. In fact, there is a counter trend now toward risk mitigation which is questioning the practice of trying to skinny down the source of supply to a point where a “hiccup” could cripple the company. Buyers should think twice about  making their supply chain too lean or they risk severely damaging their companies.

If you want to know more about the Lululemon story, there is an excellent write up written by the Stanford Closer Look Series. It’s called Lululemon: A sheer Debacle in Risk Management.

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