In procurement, we’re taught to find our best suppliers. We measure delivery performance, quality, cost competitiveness, responsiveness, innovation and compliance. Preferred suppliers are those that consistently meet or exceed our expectations, and earn higher performance scores and often a larger share of our business. These suppliers evolve into trusted partners rather than just vendors over time. But there’s a question that procurement leaders should be asking themselves more often: What happens when our best supplier becomes too important to replace?
A supplier can have a stellar performance record and yet be one of the biggest risks to a supply chain. The problem might not be the supplier’s unreliability; in many instances it’s the opposite. The buyer organization becomes more and more dependent on the supplier because the supplier performs so well. Volumes go up, other suppliers get dropped, specs get customized to that supplier’s capabilities, and internal teams get comfortable with the relationship. What looks like supplier excellence at first may become supplier concentration risk in the end.
This is one of the most underestimated risks in modern procurement. Supplier dependency is often measured much less carefully than supplier performance. Companies know exactly which suppliers are late, which have quality issues, and which have cost reductions. But they might not know what percentage of their business is tied to a single supplier, how quickly that supplier could be replaced, or if an adequate alternative still exists.
Consider a manufacturer buying a key component from three suppliers. Supplier A has excellent quality performance, competitive pricing and is always on time – 98% delivery is achieved consistently. Supplier B performs at 94% and Supplier C performs at 91% . Naturally, the procurement team moves more volume to Supplier A over time. After a few years, Supplier A is doing 80% of the company’s business. The supplier has become the natural strategic partner. From a supplier-performance perspective, this looks like a win. But from a supply-risk point of view, it could be a warning sign.
If Supplier A is hit by a major production disruption, financial problem, cyber incident, geopolitical issue or capacity constraint, the manufacturer might suddenly discover that its two remaining suppliers no longer have enough capacity to respond. While optimizing supplier performance, the company unintentionally compromised supply resilience. It distinguishes between supplier performance and supplier risk in a meaningful way. Performance asks, “How well is this supplier doing right now?” Risk says, “What happens to our business if this supplier can’t serve us tomorrow?” These are not the same question.
If the supplier is offering a highly specialized product, the challenge is even greater. Or it could develop proprietary technology, unique formulations or very specific production capabilities on behalf of the buyer. It becomes hard to reproduce the relationship. Changing suppliers can take months for qualification, new tooling, regulatory approval, technical validation or customer approval. The supplier may still be the best performer in every traditional procurement key performance indicator, but the cost of replacing it is very high.
Procurement leaders need to look at several aspects simultaneously: the importance of the supplier, how easily it can be replaced, how long it takes to switch, the financial risk involved, the geographic concentration, the reliance on capacity, the technological uniqueness, the upstream dependency, and the possible effects of disruption to the business. One way to look at this is to ask a very simple question. If this supplier stopped delivering tomorrow, how long could we continue?
If the answer is “one week,” the organization’s risk profile is vastly different than a business that could continue operating for six months. The next question should be, how long would it take to qualify and deploy an alternative? Dependency can be manageable if supplier can be replaced within days. The risk is much higher if a replacement takes 12 months and new tooling and regulatory approval.
This is where scenario planning can be useful. Procurement teams should simulate supplier failure from time to time for strategically important categories. What if our biggest supplier was out of commission for 30 days? How about 90 days? Suppose that transportation out of its area was cut off? What about if it halved its capacity? Who would be hit first – which customers or products? These exercises can uncover weaknesses that supplier scorecards can’t.
They can also transform procurement conversations with suppliers. Companies can work with strategic suppliers to build resilience, rather than waiting for a disruption to happen. This may involve holding safety stock, developing alternative materials, qualifying backup production locations, sharing demand forecasts, establishing emergency communication protocols, or jointly identifying alternative sources for critical inputs. The relationship becomes more strategic because both sides are working not just to optimize normal operations, but to protect continuity.
One more paradox is worth considering. Sometimes the better the relationship, the more the risk of complacency. If a supplier has performed well over the years, procurement teams may loosen their scrutiny. Contracts can be automatically renewed. Alternative suppliers may no longer be given development opportunities. Benchmarking may be done less often. The organization starts to take for granted that what worked in the past will work in the future. It doesn’t.
A supplier’s performance history tells us how it has performed in the past. It doesn’t guaranty how it will behave in a totally different environment. This is especially relevant in an age of increasing supply chain volatility. Companies are operating in an environment where disruption can come from outside the traditional procurement risk model. Climate events, geopolitical developments, cyber risks, volatility in energy and regulatory changes can change a supplier’s risk profile far more quickly than can be uncovered by a traditional annual supplier review.
It’s not about seeing every supplier as a possible crisis. That adds unnecessary complexity and cost. The answer is to find out where dependency is most critical, and build resilience there. So the best procurement organizations are starting to ask a different question of their best suppliers. In addition to “How do we give this supplier more business?“ it’s “How much business can we safely give this supplier?
That’s a very different conversation. Supplier consolidation can provide significant benefits. Larger volumes can enhance negotiating power, cut transaction costs, simplify supplier management and build better strategic relationships. But risk analysis, without consolidation, can lead to concentration. The goal is not to stop consolidation, but to understand the point at which efficiency starts to erode resilience.
A resilient procurement strategy accepts that supplier excellence and supplier risk aren’t mutually exclusive. The supplier with the highest performance score could also be the one with the highest business criticality. The one with the strongest relationship might also be the hardest to replace. The largest concentration exposure may also be the supplier with the largest share of spend.
The real objective of procurement, therefore, isn’t only to find the best suppliers; it’s to build a supply network that will continue to deliver when the unexpected happens. Because, ultimately, a supplier relationship isn’t judged simply by how well it performs when everything goes according to plan. It’s how prepared the business is if that supplier is unable to.
Engy El Ghalban is Operations & Supply Chain Management Instructor, Executive Education at the AUC Onsi Sawiris School of Business.