Supplier concentration describes how heavily a business depends on a select group of vendors or third party suppliers for its supplies of goods or services. A company with a high supplier concentration relies primarily on a small number of suppliers, whereas one with a low supplier concentration has a more diversified supply chain with a variety of providers.
Supplier concentration is a phenomenon that is often seen in a small business, where the business partners up with a limited number of suppliers to carry out certain functions.
This helps the businesses to cut costs and stay lean. But having a higher supplier concentration in a supply chain can pose many threats.
So let’s find out why it is so important to diversify your supply chain to avoid supplier concentration risk.
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Your supply chain should be diversified for reasons such as:
It lessens the possibility of a disruption in your supply chain in case of problems like supplier insolvency, natural disasters, or political instability,etc.
When a single supplier on whom you depend heavily has a problem, it might have a negative influence on your company’s operations.(which in turn can disrupt the whole supply chain, esp, for smaller businesses).
Diversification can boost competitiveness and save money
You can lower your costs by negotiating better pricing and terms when you source from a variety of vendors. Additionally, it enables you to assess the dependability and caliber of various vendors, guaranteeing that you are receiving the most value for your money.
Avoid supplier concentration and diversify supplier chain – 7 Steps to take
1. Determine which suppliers are essential to your company’s operations and evaluate the dangers involved with relying heavily on them(if any).
2. Conduct research on substitute suppliers: Look for substitute suppliers who can offer comparable products or services. Take into account elements including their market standing, capacity, financial security, and location.
3. Assess supplier capabilities to make sure they can meet your needs. Assess the capacities and capabilities of possible providers. Think about things like production capacity, delivery schedules, and customer service.
4. Establish connections: Connect with numerous providers to establish a network of trustworthy partners. This may entail going to their locations, talking about your requirements, and settling on terms.
5. Use dual sourcing: Take into account using a dual sourcing approach, in which you obtain the identical products or services from two or more sources. This offers flexibility and a fallback supply in the event that one supplier has problems.
6. Manage and oversee suppliers: Continually assess your suppliers’ performance to make sure they live up to your standards. Keep the lines of communication open, and deal with problems as soon as they arise.
7. Regularly assess and modify: Regularly assess your supply chain strategy and modify it as necessary. It’s critical to be flexible because of the ever changing market conditions, supplier capabilities, and your company’s needs.
You can reduce risks, boost competition, and assure the continuity of your business operations by diversifying your supply chain and lowering supplier concentration.
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Conclusion
Supplier concentration is a crucial factor every business should take into account. Having a small network or base of suppliers can pose a lot of risk in your supply chain.
In today’s fast paced business landscape, the situation of your sole supplier failing to meet the requirements can cost you heavily. In situations like these, acquiring a new supplier and maintaining the product or service quality can turn out to be quite challenging.
Addressing a supplier concentration risk in your supply chain will help you to reduce risks, bargain for lower pricing, and guarantee that goods and services will be offered even in the event of disruptions. This makes your company more dependable and effective in front of your customers and investors.
