Managing Supply Chain Concentration Risk: 4 Strategies to Increase Resilience

This post was co-authored with Ben Jones, Security Consultant, IBM Consulting.

Ensuring supply chain resilience has become much more critical in the wake of global disruptions such as the Covid-19 pandemic and the war in Ukraine, and continual cyber-attacks targeting third-party vendors and suppliers. When supply chain disruptions do occur, they are expensive and organizations typically lack the visibility to take actions. For example, IBM’s Cost of A Data Breach 2022 report found that average cost of a supply chain data breach is $4.46 million; and the Business Continuity Institute says that 72% of suppliers that dealt with a breakdown in their supply chain lacked the full, real-time visibility needed to come up with a fast and simple solution.

One of the key factors that render supply chains susceptible to such threats is supply chain concentration. Supply chain concentration risk refers to the vulnerabilities that arise when there is overreliance on a limited number of suppliers, geographic concentration, or an excessive dependence on specific routes, sub-suppliers or technologies.

This post examines challenges posed by supply chain concentration risks and provides four actionable strategies for mitigating them to improve supply chain resilience.

Types of Concentration Risks

Concentration risk can come in many forms – from using a single supplier or suppliers in a single geographic area, to focusing shipping and delivery on a single route.

Single Sourcing

Relying on a single supplier for a critical component or service can expose a company to significant risks. Any disruption, such as a production halt, quality issues, or financial difficulties faced by the supplier can quickly ripple through the entire supply chain, causing delays, product shortages, and revenue loss. For example, in early 2022 a cyberattack against a primary OEM supplier, Kojima Industries, forced Toyota to shut down production lines at their Japanese auto assembly facilities until Kojima was brought back online. Relying on a single supplier for these parts significantly impacted Toyota’s global automobile delivery.

Geographic Concentration

When a company's supply chain heavily relies on suppliers located in a specific geographic region, it becomes vulnerable to various disruptions such as natural disasters, political instability, or transportation disruptions. Such events can have far-reaching consequences, leading to supply chain interruptions and significant delays. The February 2022 Russian invasion of Ukraine is an example. It has impacted organizations that source grain, semiconductor raw materials, and other natural resources from Ukraine, forcing companies to quickly foster new supplier relationships in other geographic regions.

Overreliance on Specific Routes

Overreliance on a particular transportation route or mode can create vulnerabilities in the supply chain. If a disruption occurs, such as port congestion, labor strikes, or infrastructure failures, it can severely impact the timely delivery of goods, disrupt operations, and increase costs. When the Suez Canal was blocked by the Ever Given in March 2021, at least 369 ships were queuing to pass through the canal, preventing an estimated $9.6 billion worth of trade. Organizations that relied on that shipping route were forced to wait for it to clear.

Technology Concentration

Another often overlooked form of concentration risk is technology concentration. For example, if a large number of your suppliers relies on a specific technology to run their businesses and that technology was impacted by a software supply chain attack, then those suppliers could be taken offline resulting in widespread delivery or service delays.

This is exactly what happened during the SolarWinds supply chain breach where malicious code was inserted into the company’s Orion tool which was then pushed out to thousands of SolarWinds customers. If the ransomware activated in those environments it could have caused a cascade of disruptions across all the companies that utilize that software – including any in your supply chain. Having visibility into which suppliers leverage that technology is a crucial first step in understanding your risk exposure.

Nth-Party Supplier Concentration

A final form of concentration risk is related to the fourth or Nth parties (or sub-suppliers) that your suppliers rely on in their own supply chains. Nth-party supplier concentration risk is a microcosm of several of the risks mentioned here – geographic, technology and single sourcing. If several of your suppliers rely on the same sub-suppliers, and those sub-suppliers go off line – whether from a physical disruption or a cyber-attack – it could create a wave of disruptions in your extended supply chain.