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Business Planning - Phase II - Defend - Concentration Risk

Business Planning: Concentration Risk

Author: Brandon Jordan, CFP®, CHFC®, CEPA®, CVGA®, CLU®, MSA, EA | CEO of Impact Advisors Group

If we desire to improve the odds that our business wins long term and achieves a meaningful value, it’s essential that we build up our defense against threats, both internal and external. This series focuses on the internal threats, what they are, what IMPACT they have, and how to mitigate exposure to each of them. The top internal threats are as follows:

1. Owner Dependence

2. Key Employee Dependence

3. Unplanned Events

(a) Death
(b) Disability
(c) Divorce
(d) Distress
(e) Disagreement

4. Supplier / Vendor Concentration

5. Customer Concentration

What is Concentration Risk?

Supplier concentration risk and/or vendor concentration risk is the vulnerability a business faces from over-reliance on a limited number of suppliers and/or vendors: specific geographic region, or particular supply chain links for critical products or services. This over-dependence creates a single point of failure, making a company susceptible to disruptions from events like supplier insolvency, natural disasters, cyberattacks or financial instability. Each of these can lead to increased costs and supply chain failures. 

Why Does it Matter?

In 2018, I began working with a new client that inherited a ~30-year-old specialty parts supply business from her recently deceased father. This was unexpected and rather disruptive to their young family. The husband and wife team worked hard to keep the company going and provide for their family and employees. Given the nature of the parts being sold, customer concentration was largely unavoidable. The bigger problem was that they had a significant supplier concentration as 90% of their parts were manufactured and shipped by a single supplier in China. Given the nature of their customers (large global transportation and logistics companies), a disruption in the supply of these parts could have consequences on their customers AND their customers’ customers. Regrettably, I was unable to persuade the client to incur the necessary cost (time & money) to identify and engage alternative manufacturers and/or suppliers. The events of 2020 severely disrupted their ability to get new parts from China, which resulted in missed deliveries to their customers, which resulted in the loss of very lucrative contracts from each of their customers. After 30 years, a family business closed its doors. 

What Should We Do?

  1. Diversify Suppliers: Source from multiple vendors across different regions.
  2. Develop Strategic Partnerships: Build strong relationships with key suppliers to improve reliability and collaboration.
  3. Maintain Safety Stock: Keep buffer inventory to absorb short-term disruptions.
  4. Regular Risk Assessments: Monitor supplier health, geopolitical risks, and market changes.
  5. Invest in Supplier Development: Help smaller suppliers grow and meet your standards.
  6. Use Technology: Implement supply chain management tools to track and optimize supplier performance.

IAG is committed to helping its clients avoid such undesirable outcomes by helping to identify the salient threats and takes the steps to mitigate their negative impact! IAG believes that this great country and its citizens will benefit greatly by having more successful family business.

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