Lesson 6 of 7 Math checked Facts checked against sources on 1 October 2026 13 min

Supplier concentration and resilience

How to measure dependence on one supplier or country, price risk as probability times impact, and choose between buffers, second sources, contracts and hedges, with rare earths as the real example.

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Key takeaways

Resilience is something you buy, so price it. Expected loss is the chance of a disruption times what it would cost.
Share of a category's spend with the largest supplier, and the number of qualified suppliers for each critical part.
Share of supply from one country or one port, since one export ban, war or storm can hit every supplier there at once.
The HHI of the supplier market (from the procurement lesson): above 1,800 is highly concentrated.

Key idea

Resilience is something you buy, so price it. Expected loss is the chance of a disruption times what it would cost. Each defence (a buffer, a second source, a contract clause, a hedge) has a yearly cost; buy the ones that cut expected loss by more than they cost, and say plainly which big risks you are choosing to accept.

The toolkit lesson called resilience insurance. This lesson shows how to measure the exposure and compare the defences with numbers.

Ways to measure concentration

Share of a category's spend with the largest supplier, and the number of qualified suppliers for each critical part.
Share of supply from one country or one port, since one export ban, war or storm can hit every supplier there at once.
The HHI of the supplier market (from the procurement lesson): above 1,800 is highly concentrated.
Visibility below tier 1: your direct supplier may be diversified while all of them buy one input from the same place.

A real case of concentration: rare earths

Rare earth elements go into the strong permanent magnets used in electric car motors, wind turbines and many electronics. According to the US Geological Survey, China mined an estimated 270,000 of the world's 390,000 tonnes in 2025, and supplied 71 percent of US imports of rare-earth compounds and metals in 2021 to 2024. In April 2025 China tightened export controls on several rare earths; in October it added more, and in November it suspended the October controls for one year while the April controls stayed in place. Companies that relied on a single route for magnets had little room to react.

Timed math drill

China mined an estimated 270,000 tonnes of rare earths in 2025, out of a world total of 390,000 tonnes. What was China's share, in percent? Round to one decimal place.

Average price of neodymium-praseodymium (NdPr) oxide, a magnet input (USD per kg)

Source: US Geological Survey, Mineral Commodity Summaries 2026.

So-what

The input price more than halved between 2022 and 2024, so a fixed-price magnet contract can be very good or very bad.

Worked case

Protecting an e-bike maker from a magnet cut-off

The prompt

A fictional e-bike maker in the Netherlands makes 120,000 bikes a year, earning EUR 400 of contribution on each. All its motors come from one supplier in China, and the team puts the chance of a three-month cut-off (for example, an export licence delay) at 15 percent a year. Option A: hold three extra months of motors, at EUR 150 each and a holding cost of 20 percent a year. Option B: move 40 percent of volume to a supplier in Japan at EUR 20 more per motor, plus EUR 300,000 a year to qualify and manage it; in a cut-off it keeps 40 percent of output going. Which option creates more value?

Open this case to practice it with a partner

The structure

Value of a defence = expected loss avoided minus its yearly cost
- Expected loss today: chance x lost contribution
- Option A: buffer stock
- Option B: second supplier

Working it through

1. Bikes lost in a cut-off
Three months of output.
Bikes lost in three months:120,000 ÷ 12 × 3 = 30,000
2. Loss if it happens
EUR 400 of contribution per bike.
Loss from a cut-off (EUR):30,000 × 400 = 12,000,000
3. Expected loss
15 percent a year.
Expected yearly loss (EUR):0.15 × 12,000,000 = 1,800,000
4. Option A cost
30,000 motors at EUR 150, held at 20 percent a year.
Yearly cost of the buffer (EUR):30,000 × 150 × 0.2 = 900,000
5. Option A net value
The buffer covers the whole three months.
Net value of the buffer (EUR a year):1,800,000 - 900,000 = 900,000
6. Option B cost
48,000 motors at EUR 20 more, plus EUR 300,000.
Yearly cost of the second supplier (EUR):48,000 × 20 + 300,000 = 1,260,000
7. Option B net value
It saves 40 percent of the expected loss.
Net value of the second supplier (EUR a year):1,800,000 × 0.4 - 1,260,000 = -540,000

The recommendation

The e-bike maker should build the three-month buffer now, which is worth about EUR 0.9 million a year, and not yet move volume to the second supplier, which loses about EUR 0.5 million a year on these numbers. First, an expected loss of EUR 1.8 million a year is large next to the buffer's EUR 0.9 million cost. Second, the second supplier costs EUR 1.26 million to avoid only EUR 0.72 million of expected loss. The risk is a cut-off longer than three months, which the buffer would not cover; that is where a second source earns its place. As a next step, qualify the Japanese supplier on a small volume so it can scale up quickly, and link the motor price to the NdPr oxide index.

The defences, and what each one costs

Buffer stock of critical parts: simple and fast; costs holding cost and can go out of date.
A second source or a second country: covers long disruptions and adds price tension; costs a price premium and management time.
Contracts: reserved capacity, clear force majeure terms, and prices linked to a public index so neither side is ruined by a price swing.
Financial hedges: currency forwards fix an exchange rate; commodity hedges or index-linked prices limit input price swings. They protect margins, not physical supply.
Design: a part that can use materials from several sources, such as motors that need fewer rare earths, removes the dependence at its root but takes years.

Timed math drill

A port closure would cost a retailer EUR 4 million. The chance is 5 percent a year. A backup route costs EUR 150,000 a year and would avoid the loss. What is the expected yearly loss today, in EUR?

Check your understanding

Your client has three suppliers for a part, in three different countries. Why might it still be badly exposed?

Check your understanding

What does a currency forward contract protect against?

Terms in this lesson

Tier 1 supplier Sensitivity analysis Safety stock Force majeure Opportunity cost

Sources for this lesson (3)

Recognized public explanations of case-interview concepts and terms
US Geological Survey, Mineral Commodity Summaries 2026: rare earths (production, import sources, NdPr oxide prices, China export controls)
US Department of Justice, Antitrust Division: the HHI market concentration index and the 2023 Merger Guidelines thresholds

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