Supplier Concentration Risk: Top 1 Supplier = 60% of Purchases = Business Stops If They Stop
Manufacturer: total purchases SGD 800K/year. Supplier A: SGD 480K (60%). Supplier B: SGD 160K (20%). Supplier C: SGD 160K (20%). Supplier A raises prices 10% (SGD 48K increase) — you have no leverage to negotiate (too dependent). Supplier A has quality issue Q3: production delays 3 weeks = SGD 150K missed orders. Diversify: reduce Supplier A to 40% (SGD 320K), add Supplier D SGD 160K. New leverage: can credibly threaten to shift 20% more = Supplier A offers 5% discount = SGD 24K saving.
How to Measure Supplier Concentration#
Herfindahl-Hirschman Index (HHI) for suppliers: sum of squared market share percentages. Single supplier 100%: HHI = 10,000 (monopoly risk). Two suppliers 50/50: HHI = 5,000. Four suppliers 25% each: HHI = 2,500. Target for supply chain resilience: HHI <3,000 (no single supplier >40%). Simple rule: if your top supplier is >40% of total purchases, you have concentration risk. If >60%: critical risk.
The Financial Risk of Concentration#
Three failure modes: (1) Price increases — no negotiation leverage when dependent. Supplier raises 10%: you absorb it (can't switch quickly). SGD 480K spend × 10% = SGD 48K forced increase. (2) Supply disruption — factory fire, port strike, quality hold: production stops. Cost: missed orders × margin = SGD 150K-300K depending on inventory buffer. (3) Relationship deterioration — supplier prioritises other customers in shortage. You get allocation cuts first.
Reducing concentration doesn't mean losing volume discounts.
Diversification Without Losing Volume Discounts#
Reducing concentration doesn't mean losing volume discounts. Strategy: (1) secondary supplier qualification (identify Supplier D, run small trial orders at 10-15% of spend), (2) negotiate volume commitment with Supplier A at lower level (commit SGD 300K/year minimum for discount, vs current SGD 480K with no contract), (3) build safety stock of 4-6 weeks for critical components (buffer against disruption). Cost of safety stock: carrying cost ~25%/year of buffer value. For SGD 80K safety stock: SGD 20K/year — worth it vs SGD 150K disruption risk.
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AskBiz Supplier Concentration Analytics#
Tracks purchase orders and invoices by supplier. Calculates concentration ratio and flags risk. "Supplier concentration: Supplier A 58% (HIGH RISK — above 40% threshold). Supplier B 22%, Supplier C 20%. HHI: 3,828 (elevated). Actions: (1) Qualify alternative for Supplier A's 3 key SKUs — identify supplier from ASEAN trade directory. (2) Reduce Supplier A to 40% over 6 months (shift SGD 160K to new supplier). (3) Safety stock for Supplier A's top 5 items: SGD 40K buffer = SGD 10K annual carrying cost vs SGD 200K disruption risk. Trend: supplier concentration up 5% since last quarter (Supplier A gained more share — investigate why)."
- Manufacturer: total purchases SGD 800K/year.
- Supplier A: SGD 480K (60%).
- Supplier B: SGD 160K (20%).
People also ask
How many suppliers should a small business have per category?
Rule of thumb: 2-3 qualified suppliers per critical category. One primary (70% of orders, best price/service), one secondary (20-25%, kept warm with regular orders), one backup (5-10%, or just qualified but not ordering). Cost of qualification (audits, samples, testing): SGD 2K-10K per supplier — worth it for categories >SGD 100K/year.
What if my supplier doesn't want me to split orders?
Most suppliers understand dual-sourcing is standard practice. Frame it as: "we're growing and need backup capacity." If they object: negotiate contractual commitments (guaranteed minimum orders) in exchange for exclusivity — but only if they offer meaningful price reduction (>5-8%) to justify the dependency risk.
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Measure Supplier Concentration Risk (Reduce Dependency Before Disruption)
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