When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters. To guard against this risk, you’ve got to focus on your supply chain optimization, maintaining a constant awareness of the state of your supply chain and adjusting as necessary and feasible.
The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.
Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.
Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if there is a limit to your number of alternative suppliers.
To cope, do your research. Regularly look into what suppliers might best serve your business. Additionally, see whether new suppliers have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.
A second type of concentration risk, or supply chain challenge, is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages to cost management, such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.
But there are also risks in association to geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.
These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.
Business owners, particularly those who run smaller companies, have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our accounting firm can help with your supply chain optimization, identifying opportunities for cost-effective improvements.