Hiring guide
Supplier concentration risk: model the cash cost of a delayed delivery
By CFO Index · Published
Your largest supplier by spend is not necessarily your most dangerous dependency. A low-cost component can stop an entire order if no approved substitute is available. A useful CFO review connects that operational dependency to payment dates, replacement costs and customer collections, rather than stopping at a percentage-of-purchases chart.
Map what would stop, not only what you spend
For each critical item, record the product or service it enables, usable stock, expected consumption, confirmed delivery date and time to qualify a substitute. Ask operations whether two suppliers actually rely on the same upstream manufacturer or route. Separate confirmed information from assumptions. British Business Bank recommends periodic supply-chain reviews and considering supplier payment terms alongside disruption risk. The decision template here translates those broad considerations into a company-specific cash scenario.
Define one disruption with a clear horizon
Specify the shipment, delay and review period. Decide which orders cannot be fulfilled, which can wait and which would be cancelled. Do not treat all affected sales as permanently lost if only their timing changes. Purchasing should confirm existing payment obligations and any cancellation or refund terms; a supplier delay does not by itself establish that an agreed payment can be removed from the forecast. Keep unsupported refunds outside the base case.
Request evidence for the alternative before pricing it
An alternative supplier is not operational cover until the relevant team confirms suitability, capacity and a realistic usable-delivery date. Compare the full offer: minimum order, advance payment, testing, freight and any additional duties or taxes. Keep regulatory and product-quality approval with qualified owners. The lowest unit price may be irrelevant if stock arrives after a customer cancellation deadline or requires cash before existing commitments clear.
A replacement order can create a payment overlap
Hypothetical 14-day example: opening usable cash is €70,000. In the original case, an existing €30,000 supplier payment is due on day 5, a customer pays €40,000 on day 8 and other payments total €35,000 on day 12. In the disrupted case, assume the existing payment remains due, a replacement requires €36,000 on day 1 plus €4,000 of qualification and freight on day 2, and the customer receipt moves to day 22. These are invented assumptions, excluding tax and other movements; verify every obligation and cost in a real case.
| Date and movement | Original schedule | Disruption with replacement |
|---|---|---|
| Opening balance | 70,000 | 70,000 |
| Day 1: replacement advance | 70,000 | 34,000 |
| Day 2: qualification and freight | 70,000 | 30,000 |
| Day 5: existing supplier payment | 40,000 | 0 |
| Day 8: customer receipt in original case | 80,000 | 0 |
| Day 12: other payments | 45,000 | -35,000 |
| Day 14: no further movements | 45,000 | -35,000 |
Explain the cash gap without calling it all a loss
The day-14 difference is €80,000: €40,000 of extra near-term replacement spending and €40,000 of receipts pushed beyond the horizon. The latter is a timing assumption, not automatically bad debt. The replacement purchase may create inventory rather than an immediate expense. A negative forecast balance identifies an unfunded requirement; it does not mean the business can actually make the payments. Extend the schedule beyond day 22, including later purchase balances and all other payments, before judging recovery.
Compare complete alternatives, including doing nothing
Keep the disruption without replacement as a separate case, with its own delayed or lost customer receipts and unavoidable costs. Compare it with a smaller replacement batch, a different payment schedule or a confirmed customer extension where available. Do not combine the cheapest price from one supplier with the best terms from another. Show each option's lowest balance, service consequence and decision deadline. Any financing proposal needs a separate assessment of availability, conditions and cost; do not insert assumed funding merely to erase the gap.
Turn the review into a monitored dependency
Ask the CFO, purchasing lead and operations lead to agree who confirms the next delivery and when the backup decision must be made. Record the evidence that would change the case: a passed quality test, written payment extension or confirmed shipment. Keep proposed mitigation separate from approved action. The first useful deliverable is one tested dependency and cash comparison with named owners, not a universal concentration threshold or an instruction to diversify every supplier.