When manufacturing and distribution businesses engage with bankers, the conversation often zeroes in on customer concentration. This is undoubtedly a significant risk, as a company's future sales, cash flow and profits can become overly dependent on a handful of key buyers. However, an equally critical vulnerability often flies under the radar: single-source supplier risk.
Businesses operate as intricate, interdependent networks within the broader economy. No entity is entirely self-sufficient; every business acts as a supplier, and every business relies on its own suppliers for essential raw materials and components. Historically, there's been a strong push toward working with fewer suppliers, driven by clear benefits such as fewer contracts to manage, better supplier responsiveness, increased buying power and enhanced quality through greater leverage.
Still, supplier consolidation can create significant risk. As sourcing and procurement professionals still grapple with the echoes of the pandemic — marked by unprecedented supply disruptions, uncertain product availability and heightened banking scrutiny — it's imperative to critically evaluate these specific vulnerabilities. This inherent fragility can directly contributes to stockouts of basic and essential consumer products. Proactive strategies are essential to minimize supply chain risk and keep operations resilient.
Understanding the risks of single sourcing
While the appeal of consolidating suppliers is strong, this approach introduces significant risks of single sourcing that demand careful consideration and proactive mitigation:
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Pricing: Reduce single-source-supplier risk to your bottom line. Conventional wisdom says, the more we buy, the lower the price will be. But if we’re always buying from the same vendor due to single-supplier dependency, how do we truly know that we’re getting the most competitive price? Even in a sole-sourcing situation, it’s critical to actively ensure the prices you’re paying remain competitive. Without alternatives, your sole supplier has significant leverage to increase costs, directly affecting your margins. There should be a regular cycle for going to the market to identify any available alternatives and maintain pricing pressure.
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Design: Mitigate design lock-in. Some companies design their own products; some contract with other companies to handle design and manufacturing. If your designs are inextricably tied to a single manufacturer, you are severely committed in your purchasing decisions. This single-supplier dependency creates a significant lock-in, making it difficult and costly to switch. Having viable alternative options that you can shift to, should the situation with your primary source change, provides crucial protection against a relationship turning sour or a supplier facing unforeseen design limitations.
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Risk: Avoid the catastrophic impact of a single-supplier failure. What happens if your sole supplier suddenly runs into financial trouble and is unable to supply for you? You might find yourself becoming a reluctant funding source for the supplier, further deepening your dependency. How long would it take you to find a new supplier, vet the company for quality and ramp up production?
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Delivery: Limit single-source bottlenecks and delays. Transportation bottlenecks can stall deliveries. In the case of imports, unforeseen problems such as customs holds, tariff issues or container shortages can lead to severe delays. Without an alternative, you could find yourself waiting helplessly for that delayed delivery, watching as your nervous customers consider replacing you, all because of your single supplier dependency.
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Production capacity: Lessen vulnerability to a sole supplier's priorities. If you’re not your supplier’s only customer, what happens if another customer has needs that dominate production to your detriment? This is a key concern with sole-supplier risk. When you have a critical need and your inventory has hit your safety stock, how fast do you get a response? If your supplier's capacity is primarily allocated to a favorite or largest customer, you may end up waiting in line, facing costly delays and lost opportunities due to your single supplier dependency.
Preparing for the unexpected is not just good practice; it's a fundamental requirement for maintaining resilient operations in today's unpredictable global economy. Equip yourself with the expertise to identify, assess and mitigate supplier vulnerabilities with the ASCM Procurement Certificate.
Editor's note: This article has been updated to reflect current supply chain topics and trends. The original publish date was October 2121.
