Vendor Consolidation vs. Diversification: The Real Trade-Off
Consolidation saves administrative cost you can measure and adds concentration risk you probably have not. Put a number on both.
A choice made by drift
Few procurement teams decide to concentrate their supply, because it happens over time as a good supplier wins more categories and a weaker one is dropped. Each step is reasonable and saves effort.
The savings are visible in fewer contracts, fewer audits and better volume pricing. The risk taken on in exchange is not recorded anywhere, since nobody chose it and so nobody measured it.
Putting a number on the risk
Concentration risk can be estimated with a few plain questions for each critical input. How long could we run without it, and what would each day cost? How long would it take to bring in another source?
Exhibit 1: A worksheet for comparing the saving from consolidation with the cost of a disruption, for one input.
| Line | What to estimate | Source |
|---|---|---|
| Annual saving from consolidation | Lower price, less administration, fewer audits | Procurement records |
| Cost per day of disruption | Lost production or project delay, penalties | Operations and finance |
| Days to restore supply | Time to qualify and receive from an alternate | Engineering and procurement |
| Extra cost to recover | Expedited freight, premium pricing, overtime | Past incidents or quotes |
| Likelihood in a given year | A judgment, informed by supplier and route risk | Risk review |
Multiply the cost of an event by its likelihood and set the result against the annual saving. The estimate will be rough, but it is still better than a comparison in which one side is zero because nobody wrote it down.
What the numbers tend to show
For routine items with many substitutes, consolidation wins easily, because a disruption costs little and another source is a phone call away.
For inputs that stop a line or a project, the answer frequently reverses. The daily cost is high and qualification is slow, so a modest ongoing expense for a second supplier is cheap by comparison.
In one composite engagement, a specialty chemicals producer with one feedstock supplier had its margins squeezed in two price spikes. Pre-qualifying two further suppliers through our Trading network reduced that exposure with no new capital project. Read the feedstock strategy case study.
Set the rule before the event
The best time to decide is when nothing is wrong, and organizations that handle this well write a simple policy. It names the categories of spend that are critical enough to need at least two qualified suppliers, whatever the administrative cost.
- Define criticality by consequence: what stops if this input does not arrive?
- Apply the two-supplier rule to that list and nowhere else.
- Give each second supplier enough volume to keep the relationship active.
- Review the list yearly, since products and processes change.
Everything outside the list can be consolidated freely, and often automated, as discussed in digital procurement platforms and the limits of automation.
This article deals with the cost comparison. For how to qualify an alternate, see supply chain resilience for oil and gas buyers, and for feedstock, where acquisition is also an option, see feedstock diversification.
Key takeaways
- List your sole-sourced inputs and mark those that would stop production or a project.
- For each, estimate the cost of a disruption in downtime, expedited freight and lost sales.
- Compare that estimate with what consolidation saves in administration and price.
- Write a policy naming the categories that require a second qualified supplier.
Quantify your concentration risk
Synergy Nexus Trading can review your supplier base, identify critical single-source inputs and propose qualified alternates.
Digital Procurement Platforms and the Limits of Automation
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Feedstock Diversification: Build, Buy or Contract
When a single feedstock supplier becomes a risk, there are three answers. Boards usually see only one of them worked up properly.
Navigating Commodity Price Volatility in Procurement
Buying at the lowest spot price works until the market moves. Resilient buyers weigh availability, terms and reliability alongside price.