Analyst Insight: The Gartner® Market Guide for IT Vendor Risk Management Solutions

Managing Supply Chain Concentration Risk: 4 Strategies to Increase Resilience

Avoid supply chain disruptions with improved supplier risk visibility, contingency planning, and an agile supply chain risk management strategy.
Scott Lang
VP, Product Marketing
May 22, 2023
Blog supply chain concentration risk

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.

Discover Best Practices for Supply Chain Resilience

Expand your knowledge of supplier risks and get prescriptive guidance for maturing your supplier risk management program.

Read Now
Feature srm definitive guide

4 Tips for Reducing Supply Chain Concentration Risks

To overcome the challenges of concentration risk, consider the following strategies.

1. Centralize the management of your supplier base

Many organizations utilize different toolsets and data feeds to assess and monitor their suppliers, which naturally creates silos of data and teams. Centralizing all supplier insights into a single supplier profile ensures that all departments that engage with suppliers are leveraging the same information, improving visibility and decision making.

Build comprehensive supplier profiles that compare and monitor supplier demographics, geographic location, fourth-party technologies, and recent operational insights. Having this accumulated data will enable you to report on and take action against geographic and technology concentration risk especially.

2. Diversify your supplier base

Actively diversifying the supplier base is crucial for mitigating concentration risks. Companies should identify and develop relationships with multiple suppliers, preferably across different geographic regions, to ensure a more robust and resilient supply chain. Evaluating suppliers based on their capabilities, financial stability, and risk management practices can aid in identifying reliable partners.

Using the results from your comprehensive supplier profile, or by conducting a questionnaire-based assessment or passively scanning the third party’s public-facing infrastructure, build a map of suppliers to identify relationships between your organization and suppliers to discover dependencies and visualize information paths and routes.

3. Plan for contingencies and loss events

Implementing contingency plans is essential to prepare for the potential loss of a key supplier or a disruption in the supply chain. Companies should assess the criticality of suppliers and develop backup plans, such as identifying alternative suppliers, negotiating dual sourcing agreements, or establishing safety stock levels.

Start by performing an inherent risk assessment that examines supplier criticality to business performance and operations; location; and level of reliance on fourth parties (to avoid concentration risk). From this inherent risk assessment, your team can automatically tier suppliers; set appropriate levels of further diligence; and determine the scope of ongoing assessments.

Then, assess top-tier supplier business resilience and continuity plans based on an industry standard such as ISO 22301 to:

  • Categorize suppliers according to their risk profile and criticality to the business
  • Outline recovery point objectives (RPOs) and recovery time objectives (RTOs)
  • Ensure consistent communications with suppliers during business disruptions

Continuously monitoring for supplier events is also critical to getting ahead of potential disruptions.

4. Invest in supply chain visibility technologies

Leveraging advanced supply chain visibility technologies can enhance a company's ability to monitor and manage risks effectively. Real-time data and analytics enable organizations to identify potential disruptions, proactively respond to emerging issues, and optimize supply chain operations. Technologies such as IoT, blockchain, supplier risk assessments and monitoring, and predictive analytics can provide valuable insights and facilitate informed decision-making.

Build a Solid Foundation for Supply Chain Risk Management With Prevalent and IBM

Supply chain concentration risk poses significant challenges to organizations, potentially leading to disruptions, delays, and reduced adaptability. By identifying the risks, companies can take proactive measures to mitigate these vulnerabilities.

Building a central supplier inventory, embracing supplier diversification, developing contingency plans, and investing in supply chain visibility technologies can help build a resilient supply chain that is better prepared to withstand disruptions, adapt to changing market conditions, and ensure uninterrupted operations. By managing supply chain concentration risk effectively, companies can safeguard their operations, enhance customer satisfaction, and achieve long-term success in a volatile business environment.

IBM and Prevalent have partnered to build cyber resilience into supplier ecosystems. Contact us to schedule a strategy briefing and get on the path of eliminating supplier concentration risk today.

Leadership scott lang
Scott Lang
VP, Product Marketing

Scott Lang has 25 years of experience in security, currently guiding the product marketing strategy for Prevalent’s third-party risk management solutions where he is responsible for product content, launches, messaging and enablement. Prior to joining Prevalent, Scott was senior director of product marketing at privileged access management leader BeyondTrust, and before that director of security solution marketing at Dell, formerly Quest Software.

  • Ready for a demo?
  • Schedule a free personalized solution demonstration to see if Prevalent is a fit for you.
  • Request a Demo