The Biggest Risk is Where Nobody is Measuring

For many years, whenever I heard discussions about concentration risk, the focus was usually on customers.

“What happens if the largest customer leaves?”

A valid question.

But it is not the only one.

A business can become highly concentrated in many different areas:

• Customers • Products • Inventory • Suppliers

And in many cases, the problem does not show up in profit.

It shows up when something goes wrong.

If 60% of sales come from two customers, there is risk.

If 70% of inventory value is tied up in a handful of slow-moving SKUs, there is risk.

If production depends on a single key supplier, there is risk.

If most of the gross profit comes from one product, there is risk.

That is why I am often interested not only in how much a company earns, but also where those earnings come from.

Concentration itself is not necessarily bad. Many successful businesses are highly concentrated. The issue is not concentration. The issue is dependency. The real question is different:

If I remove the most important 20% of this business, how much of the business remains?

To answer that objectively, analysts can use measures such as the Herfindahl-Hirschman Index (HHI), the Gini Coefficient, and other concentration metrics.

But before looking at any metric, there is a simpler question:

Do you know where concentration risk actually exists inside your business?

Because in many cases, the biggest risk is not where everyone is looking.

It is where nobody is measuring.