What is Supplier Concentration?
The Short Answer
Supplier Concentration explained simply
Supplier Concentration happens when a business gets most of its supplies from just one or a few companies. This can be risky because if something goes wrong with those key suppliers, the business could be in trouble. For example, if a main supplier raises prices, goes out of business, or can’t deliver, the business might struggle to find alternatives quickly. Buyers looking to purchase a business pay close attention to supplier concentration. They want to make sure the business they are buying isn’t too dependent on a few outside companies, as this can affect the business's stability and future profits.
Real-World Example
The Single-Source Widget Maker
Imagine a company that makes custom widgets. 80% of the specialized metal they need comes from one supplier. If that supplier has a fire at their factory, the widget maker can’t get their metal. This stops production, delays orders, and costs the widget maker money. A buyer would see this as a big risk because the widget maker’s success is tied to that single supplier.
Why this matters
Supplier concentration matters because it creates risk. If a business relies too much on one or a few suppliers, it’s vulnerable to problems with those suppliers. This can affect a business’s operations, costs, and ability to deliver to its customers. Buyers will often see high supplier concentration as a negative, as it can impact the future stability and value of the business.
Always try to diversify your suppliers. Having multiple options reduces your risk and gives you more negotiating power. It makes your business more resilient.
Always try to diversify your suppliers. Having multiple options reduces your risk and gives you more negotiating power. It makes your business more resilient.
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