Supplier Concentration

Relying on a few suppliers can create risks. If a key supplier raises prices, delivers late, goes out of business or is hit by a disaster, the company's operations and profits can suffer.

For example, a car manufacturer that buys a critical chip from one supplier could be forced to halt production if that supplier's factory is disrupted. Shortages of semiconductors in 2021 and 2022 showed how supplier concentration can disrupt entire industries.

Concentrated suppliers also have more bargaining power, allowing them to set prices and terms. This can squeeze the buying company's margins.

Companies manage supplier concentration by using multiple suppliers for important inputs, building strategic relationships with key suppliers, holding safety stocks and, in some cases, producing critical components themselves. There is a trade-off: concentrating purchases with fewer suppliers can lower costs and simplify management, while spreading purchases reduces risk.