Supplier concentration: the four checks that show what it is costing you

Why concentration is a margin problem before it is a risk problem

Supplier concentration is usually discussed as continuity risk: what happens if the supplier fails. The margin question comes first. When three suppliers hold most of your cost of goods sold (COGS) and nobody has run a competitive bid in two years, the price you pay is set by habit, not by the market. In the SEAS diagnostic this is the third of the three FLOAT pockets, and in the modeled reference company it carries the largest single number of the three: 1 to 3 percent of margin, $1.5 million to $4.5 million on $150 million of revenue.

The four checks

The inventory figure assumes an inventory base near 13 percent of revenue, typical of manufacturing and distribution; verify against your own balance sheet. The energy check applies mainly to companies with facilities, fleets or process loads.

Running the checks

1. Concentration, 10 minutes. From the vendor ledger, rank suppliers by trailing twelve-month spend. Sum the top three, divide by COGS.
2. Bid recency, 5 minutes. For the top ten suppliers, record the date of the last competitive quote. Procurement usually knows; if nobody knows, the answer is "more than two years."
3. Inventory turns, 10 minutes. COGS divided by average inventory, compared with the peer median for your sector. The SEAS EBITDA Analysis Report workbook carries the benchmark table.
4. Energy variance, 5 minutes. Energy cost this year against last year, adjusted for production volume. A variance above 10 percent that volume does not explain is the flag.

What the purchase order history adds

Concentration tells you where the leverage is; the purchase order (PO) history tells you what the relationship is actually costing. Two numbers matter: the late delivery rate and the share of purchase orders approved manually. In the SEAS sample dataset of 180 purchase orders across 15 suppliers, 77 percent of deliveries were late and 69 percent of orders were approved by hand. Late deliveries cost expediting fees and premium freight; manual approvals cost cycle time and the attention of people who should be negotiating. A supplier performance scorecard built from that history is the document you take into the re-bid.

Turning the checks into levers

Three of the ten SEAS operational levers start here. Vendor procurement leverage (lever six) re-bids the concentrated categories: 0.5 to 1 percent of COGS in six to eight weeks, moderate complexity, second wave. The supply chain control tower (lever five) automates reorder points and supplier scoring: $1 million to $3 million a year in twelve weeks, the highest absolute impact of the ten. Working capital optimization (lever nine) works the inventory turns: a modeled $2.8 million release in eight to twelve weeks. The Supply Chain PO and Lead-Time agent runs the scoring continuously once the pocket is confirmed, flagging auto-approvable reorder patterns and pricing the cost of manual processing and late deliveries.

The objection worth taking seriously

"We concentrated on purpose, for quality and service." Sometimes true, and the checks do not argue with it. They ask a narrower question: when did that supplier last have to earn the price? A single competitive quote every two years, even one you decline, keeps the incumbent honest and usually pays for the procurement analyst who runs it.