Inventory Management Review: Reader Response

April 21, 2006

Reader Response

Recently, IMR reader Gwen left a comment on the site that made me think of a few thoughts worth writing about. Her comment was in response to my article on the risk of keeping a small number of suppliers. She said that while it's risky to keep only one supplier, it's also believed to be risky to "keep only one business."

Without a doubt, Gwen, there are risks associated with keeping all of your eggs in one basket. What's worse is having two different sets of eggs, each an integral part of your business, both kept in only two baskets.

Hard to follow metaphors aside, what I'm trying to say is that as risky as it is to keeping only one supplier, because if the supplier fails you, you may fail, and as risky as it is to keeping only one business, because if that business fails, you may fail, the risk associated with keeping only one business with only supplier is a far greater risk than either risk on its own.

This is just simple statistics that if there is a 50% chance your one business will fail and if there is a 50% your one supplier will fail you, you do not have a 50% of success, but rather a 25% percent chance of success.

However, some risks are a necessary part of business. Maybe, the only way to succeed is to rely on one supplier. That could be the only way to achieve a much-needed JIT system because of the work associated with getting such a system running properly, and without the lower holding costs of a JIT system, competition will crush you.

But, as we mentioned, this is very risky. And, if only having one core business is risky, then what does this tell us about firms like Wal-Mart that utilize a broad product line compared to firms like Toyota with a much smaller product line, or how about a mom and pop shop trying to cut down on their number of suppliers in order to lower inventory in a poor attempt to compete with Wal-Mart on price? Perhaps an inherent disadvantage is occuring here.

But, to respond to Gwen's comment, I agree, there is risk with keeping only one business. On the flip side, there is also a chance for an explosion of profits. Fortunately, I'm the son of a mutual fund industry veteran so I know enough about hedging my bets to keep from putting all of my eggs into one basket.

But, there is a time and place for investing in one business. More appropriate to this site, there is a time and place for investing in a sole supplier. Risky, perhaps, but more importantly, there is a potential for a competitive advantage.

If there are better ways to achieve better drops in inventory then by relying on a sole supplier, then obviously go for it. But, if it comes down to taking on more risk for a potential large competitive advantage, then you need to ask yourself, is the risk worth the added value?

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April 21, 2006 | Permalink