AbstractQuality management practitioners in the USA such as W. Edwards Deming, strongly advocate the Japanese model of supplier relationships‐recommending substantial specific investment in a single supplier for improved co‐ordination and higher quality. But the strategy literature and conventional wisdom favor multiple sourcing, suggesting that a high level of specific investment in a sole source will lead to problems with supplier performance. Using agency theory, we construct a model to evaluate the tradeoff between the costs to set up and coordinate with suppliers and the incentive for performance provided by competition. We find that the validity of Deming's Point Four, that sole sourcing is more profitable than competitive sourcing, depends on parameters such as profit sensitivity to supplier performance.