How can a company reduce supplier dependency risk?
Assess the impact of supply disruption, switching time, alternative sources and dependence on major customers. Compare resilience options and their costs.
How can supplier dependency risk be reduced?
We don't need to, nor can we afford, to increase our supply sources for all of our components. The order is to look for items that stop production when cut off and take a long time to replace, and then select the right alternative among dual procurement for each item, safety stock, and joint planning with partners. Studies have shown that companies that experience supply disruptions suffer large losses and are slow to recover, so calculate for each item whether it is worth spending the money to prepare before an incident occurs.
How big a loss will a supply disruption cause to a company?
According to a study (Hendricks, Singhal, 2005) that analyzed 827 cases of supply disruptions announced from 1989 to 2000, the company's abnormal stock price return from one year before to two years after the announcement was close to -40% on average. The slump was mainly observed in the year before the announcement, on the day of the announcement, and one year after the announcement, and companies did not recover quickly from the impact of the disruption. The risk of stock price fluctuation one year after the announcement was 13.50% higher than the one year before the announcement. The fact that sluggish performance began a year before the announcement can also be read as meaning that signs of setbacks are revealed before the official announcement.
The subjects of the study are U.S. listed companies and the times are different, so the numbers cannot be translated as is. However, it is worth noting even for small-scale companies that supply disruptions do not end with a one-time production loss but have a long-lasting impact on customer trust and corporate value.
How common is transactional dependency in our small businesses?
In the “Survey on Small and Medium Enterprises as of 2024” announced by the Ministry of SMEs and Startups in January 2026, 16.7% of SMEs, excluding microenterprises, were suppliers in subcontracting transactions. The proportion of transactions with consignment companies in the sales of supply companies, or dependence on consignment companies, was 67.3%, and the manufacturing industry was even higher at 72.5%. Difficulties in order/consignment transactions were not reflecting the increase in raw material prices in the delivery price (38.6%), irregular ordering (26%), and shortened delivery time (26%).
Dependence is not only one-way. Just as partners rely on the main contractor for sales, the main contractor often relies on one or two partners for key parts. Either way, if the other side falters, our business will falter as well, so we need to check both sides.
Which partners should I check first?
It should be viewed not in order of purchase amount, but in order of impact when disconnected. Even if the unit cost is low, if there is no substitute, the entire finished product will come to a halt.
Partner Dependency Risk Checklist
| Check items | Questions to ask | red flag |
|---|---|---|
| Substitutability | Are there other companies that can supply the same quality? | Difficult to change due to certification or mold |
| recovery period | If supply is cut off, how long does it take to get it back? | The recovery period is longer than the inventory depletion period. |
| Partner finance | Does the partner company have the financial capacity to endure? | Requests for early payment become more frequent |
| Geographic concentration | Are the suppliers concentrated in one region or one country? | Simultaneous exposure to the same disaster or regulation |
| interdependence | The proportion of our products in our partners’ sales is | The importance is so large that our partners rely on us. |
Write down the inspection results on a line for each item, putting items that are difficult to replace and require a long recovery period at the top. It must be filled not only by the purchasing department but also by production and quality managers to avoid wasting time for certification or process changes.
What alternatives are there to reduce dependence?
The institute compares the conditions, costs, expected effects and risks of each option side by side.
Comparison of supply-dependent response alternatives
| alternative | suitable conditions | cost | danger |
|---|---|---|---|
| dual sourcing | Quality certification from alternative companies is possible | Rising unit prices, management burden | The relationship between partners is weakened due to the division of supplies. |
| safety stock | Easy to store and stable demand | Inventory funds and storage costs | Inventory loss when product changes |
| Joint planning and long-term contracts | Difficult to replace and trustworthy partners | Negotiation and information sharing costs | When our partners shake, we shake together |
| Design standardization | Possibility to replace dedicated parts with universal parts | Redesign and recertification costs | Possibility of weakening product differentiation |
There is no need to choose just one alternative. For parts that take a long time to replace, you can buy time with safety stock and proceed with certification from a second supplier in the meantime.
How do governments manage supply chain risks?
The Framework Act on Support for Supply Chain Stabilization for Economic Security defines supply chain risk as a state in which the supply chain is at risk of being damaged due to changes in domestic and international economic, trade, political, or diplomatic situations, natural disasters, or logistics failures. The government designates essential supplies and raw materials that are highly dependent on imports from specific countries or regions as economic security items, manages them considering external dependence and dependence on specific countries, and operates an early warning system. If we check whether the raw materials our company uses fall into these categories, we can take advantage of the government's supply chain information and support. Since the law separately defines supply chain crisis situations and crisis items, it is also a good idea to designate a person in charge to check government measures and announcements during a crisis.
How should we build relationships with our partners?
It is as important as having multiple partners to ensure that key partners can survive for a long time. When raw material prices rise significantly, setting delivery price adjustment standards in advance reduces the burden on partners and stabilizes supply. You can see whether cost increases will be reflected in customer prices at Things to consider before raising prices, and country of origin management when using overseas suppliers can be found at Select the country for your first overseas expansion. Korea Research Institute of Business & Branding has been expanding supply chain and crisis response research since 2020, with responsibility as a core value that considers the impact of proposals on customers, members, and partners. Check out Corporate competitiveness analysis for research on the relationship between organization, finance, and operations, and check out Management research and advisory field for the entire field.
Supply Chain Risk Frequently asked questions
Is it necessarily risky if there is only one partner?
There are also advantages in quality control and negotiations. If the recovery period is short and you can survive on inventory, you may choose to maintain one location but have an emergency plan in place.
How much safety stock should I keep?
If your supply is cut off, use as a guideline how long it takes to find and certify another source. The key is whether you can survive that period.
How do I check the financial status of my partner company?
If you have public data, keep a record of financial statements. If not, keep a record of transaction signals such as requests to change payment terms or late delivery dates.
Doesn’t the unit price go up if you do dual sourcing?
If the quantity is divided, the unit price may rise. Compare the difference with the loss in the event of a supply disruption and consider it like an insurance premium.
References
- Production and Operations Management, 「An Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price Performance and Equity Risk of the Firm」(Hendricks, Singhal), 2005. https://doi.org/10.1111/j.1937-5956.2005.tb00008.x
- Ministry of SMEs and Startups, “2024 Survey on Small and Medium Enterprises” reorganization and results announcement (press release), January 9, 2026. https://www.korea.kr/briefing/pressReleaseView.do?newsId=156739127
- National Legislation Information Center, “Basic Act on Support for Supply Chain Stabilization for Economic Security”, takes effect on June 24, 2026. https://www.law.go.kr/법령/경제안보를위한공급망안정화지원기본법