When manufacturing and distribution businesses talk with bankers, the conversation often turns to customer concentration. This is a major risk factor for companies because their future sales, cash flow and profits depend on the strength and staying power of a few customers. However, the risk is just as great with supplier consolidation — which is talked about far less.
Businesses operate as part of a complex network within a greater economy. None of them are totally self-sufficient; they are interdependent. Every business is a supplier that has suppliers they depend on to provide them with raw materials. In the same way, every business is a customer that has customers they depend on to buy their products.
There has always been a tendency to work with fewer suppliers. The benefits include
- fewer contracts to maintain, resulting in time and cost savings
- better supplier responsiveness
- increased buying power as a result of sending more orders to the same supplier
- better-quality results from greater leverage.
However, supplier consolidation also has the potential to create greater risk for your company. In light of the business issues surrounding the pandemic — such as loss of sales, uncertain product supply and increased banking scrutiny — it is important to evaluate the following risks and strategize how to minimize risk and keep your operations moving.
1. Pricing: Conventional wisdom tells us the more we buy, the lower the price will be. But if we’re always buying from the same vendor, how do we know that we’re getting the most competitive price? Even in a sole-sourcing situation, it’s important to be certain that the prices you’re paying are competitive. There should be a regular cycle for going to the market to identify any available alternatives.
2. Design: Some companies design their own products; some contract with other companies to handle design and manufacturing. If your designs are tied to a single manufacturer, you are committed in your purchasing. Having options that you can shift to should the situation with your primary source change may provide some protection against a relationship turning sour.
3. Business risk: What happens if your sole supplier suddenly runs into financial trouble, can’t buy raw materials or make payroll, and is unable to supply for you? This risk is always present, but it is especially concerning during a pandemic and economic recession. Out of necessity, you might become a funding source for the supplier as well as a major customer. How long would it take you to find a new supplier, vet the company for quality and ramp up production? In this day of instant gratification, it won’t take long for your customers to replace you if you’re unable to deliver because of supplier issues.
4. Delivery: Unless your critical supplier is right across the street, they need to ship your products and materials. Transportation bottlenecks can stall deliveries. In the case of imports, unforeseen problems can be created by customs holds, tariff issues or container shortages. Without an alternative, you could find yourself waiting helplessly for that delayed delivery while your nervous customers consider replacing you.
5. Production capacity: If you’re not your supplier’s only customer, what happens if another customer has needs that dominate production to your detriment? When you have a need and your inventory has hit your safety stock, how fast do you get a response? If your supplier’s capacity is allocated to favorite customers and you’re not among them, you may end up waiting in line.
If your primary products or raw materials all come from a single source, this creates serious risk. It’s essential to beware of the risks that you face with your primary suppliers. Prepare for the unexpected.