Supplier Over-Reliance: A Recipe for More Risk, Less Resilience

Most North American companies that use international suppliers often debate how many they should use.

While it’s often cost-effective and more efficient to use international suppliers than domestic ones, questions inevitably come up.

Is it better to partner with fewer suppliers? Will this help us improve the quality of goods delivered? Should we allocate the production of all our goods to a single country? Is it better to diversify production to multiple suppliers across multiple countries?

If you ask us, it’s better to diversify your supply chain across suppliers and countries. This will reduce your risk considerably, as Arthur K. Watson, former president of IBM’s World Trade Corporation, championed during his tenure at the technology giant from the 1940s - 1970s.

A keen traveller, Watson saw the future of IBM outside of the U.S. and made connections with manufacturers and suppliers all over the world. He helped build up economies in Asia and Latin America, forged lasting relationships with the European Economic Community and established computer training camps in Africa. By the time Watson resigned in 1970, IBM’s World Trade Corporation sales had grown to over $2.5 billion and business operations were set up in 108 countries.

IBM has continued Watson’s work, partnering with suppliers in several countries that include India and Brazil. As they haven’t put all their eggs in one basket, IBM has become more resilient against supply chain risk.

The opposite approach is to rely on only a few suppliers and allocate production to a single country. But that’s a sure-fire recipe for increasing supply chain risk.

Let’s put it this way. Imagine if over 50% of your international suppliers are based in one country and there’s a lot of political unrest. This could lead to worker protests, walkouts or a complete factory shutdown – all of which will bring your production to a screeching halt.

But that’s not the only danger. If you don’t do any due diligence on your international suppliers and over 50% of them get into financial trouble and have to shut down their factories, that means those orders (which are likely to account for a significant volume of your sales) can’t be completed. And then you’ll be stuck in a hard place, trying to find other suppliers who can take those orders and hoping they have capacity. If they don’t, you could end up with product shortages, which means your customers won’t get the products they need and want. And that could make them frustrated and more likely to buy from your competitors. Not what you want to happen, right?

There really is so much to consider if you want to de-risk your global supply chain. So, let’s explore some of the dangers associated with supplier over-reliance. The more you know, the better equipped you’ll be.

Chapter 1

Danger 1: Product shortages

Distributing most or all of your overseas manufacturing to a few key suppliers in a single country like China, Vietnam or Taiwan can put you at risk of product shortages, especially if there’s political upheaval, worker disputes or other factors beyond your control. Just look at the disruption that has been caused by China’s zero COVID policy limiting the supply of goods for companies like Tesla. In 2022, the organization reported a production drop of 20% at its Shanghai Giga Factory. The company also had to deal with a destructive heatwave that closed down factory production.

COVID-19 issues have spilled over into Vietnam too. It’s a promising offshoring region for major clothing companies like Nike and the American Apparel and Footwear Association. Yet, Nike reported 10 weeks of lost production due to COVID-19 restrictions.

Then there’s the growing tensions over international unification between China and Taiwan to consider. As Taiwan is a leading manufacturer of semiconductors, military conflict with China could bring on further supply chain disruption and mirror the issues that have happened because of the Russia and Ukraine war.

Chapter 1

Danger 2: Quality control issues

Another consequence of using only a few suppliers is quality control issues. Let’s say a couple of factories in the same location shut down due to a worker strike. Not only is your supply of products now limited, but you may have lost access to your highest-quality materials.

And then consider what will happen if the only other option is to work with a subpar supplier that provides you with damaged goods. But because you have high customer demand to fulfil in a short amount of time, you can’t afford to be picky. This will inevitably lead to customer dissatisfaction and a loss of repeat sales down the line.

Another scenario is that you’d have to get the goods produced again, meaning more money and time are wasted. A cautionary tale of this happened back in the 1980s with General Motors. Then CEO Robert Smith spent billions of dollars on robots that would be used on the manufacturing lines. But the robots constantly malfunctioned because of supplier oversight and a lack of quality control. The result? A slowdown in distribution, major sales losses and the breaking of customer trust.

Chapter 1

Danger 3: Supplier price hikes

The reality of price hikes needs to be addressed and they typically stem from the rise in shipping costs that suppliers have had to deal with since the pandemic. According to the IMF, the cost of shipping a container on the world’s transoceanic trade routes increased seven-fold in the 18 months following March 2020. This happened while the cost of shipping bulk commodities spiked even more.

If you can’t afford these price hikes, you may have to look for other suppliers to replace them, which takes time and could create issues with meeting customer demands. It also means that you can’t get the best prices from other suppliers and may still have to pay more in the end.

Chapter 1

Best practices for reducing supply chain risk

Tip 1: Vet suppliers for financial stability

Now that we’ve made the argument for why it’s better to diversify your suppliers, there’s a lot you can do to strengthen your supply chain. And the first thing to do when selecting new suppliers is to have a thorough vetting process. A big part of that is their financial history - you need to make sure suppliers have a strong cash flow and aren’t in danger of shutting down any time soon due to financial or legal issues.

A simple way to do this is to run an international credit report that looks at all aspects of financial performance. It’s not just about credit scores or credit limits. It’s going deep with your investigation should include the following types of data:

Days Beyond Terms (DBT): This refers to how many days past the agreed payment terms a supplier pays its invoices. If the supplier has a low DBT of 2 - 3 days, this indicates that they’re reliable and pay their invoices on time. But if the supplier’s DBT is high (for example, 10 - 20 days), this could indicate a bigger cash flow problem, which could make it tough for them to maintain operations long-term.

DBT peer analysis: Benchmarking and comparing the DBT scores of other suppliers in the same industry will reveal a few things. When you know the industry average and see a supplier with a higher DBT score, that’s a clear sign that they’re unlikely to be reliable with payments. You also become more efficient with selecting suppliers that can meet your production needs and are less likely to have financial problems.

Legal filings: This includes state and federal tax liens, lawsuits, court judgements and UCCs. Working with a supplier that has legal issues is going to impact your revenue, customer demand timelines and production schedules. How? They could potentially be setting aside millions of dollars for legal fees and settlements. On top of that, associating with suppliers that are embroiled in legal trouble reflects poorly on your own business.

Total amount past due: This metric will give you hard evidence of exactly how much a supplier is racking up in past due payments. It may point towards behaviors like overspending, not generating enough sales and other questionable practices that will put your supply chain at further risk.

Vetting suppliers for financial stability

Tip 2: Have plenty of backup suppliers

We know it takes time to vet suppliers to make sure you find the best ones who can deliver high-quality goods on time at a price that makes sense for your business. But you shouldn’t assume everything will always go as planned. The pandemic taught us just how dangerous that assumption can be.

And it’s not just pandemics that can throw a wrench into your supply chain. Suppliers can run out of money and have to shut down. Worker disputes can also lead to production slowing down or stopping altogether.

So, you need to identify suppliers and keep them as backups in case something goes awry with your existing set of suppliers. This will help you adapt to unforeseen factory closures and political unrest. Being caught off guard isn’t just annoying; it’s a sure-fire way to lose money and destroy the goodwill of your customers.

As part of the vetting process for your backup suppliers, you should have a checklist that covers:

Product quality and delivery: What quality control criteria do suppliers have to meet? What kind of materials are acceptable? How fast do you expect the delivery of goods to be?

Communication policy: What is your preferred method of communicating with suppliers and are they open to those expectations?

Pricing: What is the most you’re willing to pay for a certain type of product? How does one supplier compare to another in cost?

Mutual values: Does the culture of a supplier match your own? Is there a consistent process in place that ensures a high level of service? Do they have policies and systems in place to make sure they aren’t using forced labor or child labor to produce your goods?

Tip 3: Do due diligence in foreign countries

We also recommend understanding the economic, social and political context of the country you’re using for offshoring. And when doing your supplier selection, never assume the climate is stable. Things change every day and you should keep updated with new legislation, laws and political sanctions in the countries that you’re focusing on.

In relation to suppliers, this could involve checking global sanctions lists to make sure they haven’t been convicted of any serious crimes in a specific location. It could mean using information from the US Securities and Exchange Commission and comparing it with data from foreign government bodies to make sure everything is above board.

About the Author

Bill James

With over 15 years of experience in finance, risk management and data analytics, Bill understands exactly what enterprise businesses should be thinking about as they build their corporate growth and risk strategies. Prior to joining Creditsafe in 2021, he spent six years at Dun & Bradstreet as Area Vice President of Finance Solutions and Third-Party Risk & Compliance.

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