The Risks of Suppliers

Every company has vulnerabilities. For example, if you only have one customer or client and you lose them, you are out of business unless you can find at least one new customer. The more common scenario is when a company has multiple customers but one or two customers represent such a significant portion of their business that the loss any of them would considerably alter the picture. This change could be forcing a closure, cutbacks in employees, or other forms of financial belt tightening. Probably you are aware of this risk and are hopefully doing something to mitigate it.

There is another risk that many companies overlook–risks of suppliers.

Dependency

You have undoubtedly heard the expression, “Don’t put all your eggs in one basket.” But, this is exactly what many companies do when they are totally dependent on one supplier of the products they sell. Even if they are dependent on one supplier for just a significant portion of what they sell, they may well be exposing themselves to unnecessary risk.

At Their Mercy

When you are highly dependent on one or just a few suppliers, you are at their mercy. What happens if they decide to raise prices and you have no alternative? What happens if you get past due on paying them and they cut off your supply of products? If your supplier fails and goes out of business will that be the end of your company?

It is wise to have alternatives if at all possible. I realize of course that some business specialize in particular products and that there is little they can do to change that. But, if your company is not one of those, give yourself some breathing room and bargaining power. The day may come when you will be glad you did.

A Rule of Thumb

A good guideline to minimize risks of suppliers is to try to keep your purchases of products you sell to no more than 10% for any one supplier. Of course, sometimes this is not possible, but it makes life easier if you can. There is a nuance to this, however. Though one supplier may represent 10% or less of the sales you generate, if what they supply is crucial to the success of other products, you might want to consider finding alternative sources or expanding into other lines to limit your exposure.

Have you taken a close look at your product mix? Do you have significant exposure to the risks of suppliers? This could be your weakest link.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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