Supplier concentration

Definition

How much of what a business buys comes from one or two vendors.

Why It Matters

Customer concentration gets the attention and supplier concentration does the damage more quietly. A single distributor behind most of the cost of goods can reprice at renewal, tighten terms from net thirty to cash on delivery, or decline to serve the account under new ownership, and any of the three moves the margin the whole deal was priced on. Ask whether the supply agreement transfers, whether the pricing is tiered on volume you may not hit in year one, and whether a second source has ever actually been used rather than merely identified.

In numbers: A shop buying 70% of its materials from one distributor gives up about $84,000 of annual margin if that supplier lifts prices 6% on $2M of purchases.