Merchant concentration analysis

Merchant concentration analysis measures the distribution of spend across suppliers, typically using metrics like the percentage of total spend going to the top 5, 10, and 20 vendors. High concentration means a few suppliers account for a large share of expenditure, which creates supply chain risk if any of those vendors experience disruption. Low concentration (highly fragmented spend) means the organisation is spreading purchases across too many suppliers, missing volume discount opportunities.

The ideal balance depends on the category. Strategic categories like cloud hosting may warrant concentration with a single provider to maximise commitment discounts. Commodity categories like office supplies benefit from competitive bidding across multiple suppliers to keep prices low.

Rank all vendors by total spend and calculate the cumulative percentage. Identify the number of vendors that account for 80% of total spend (the Pareto analysis). Calculate concentration ratios such as the share of spend held by the top 10 suppliers. Compare concentration levels across categories to identify where consolidation or diversification is needed. Repeat the analysis quarterly to track whether the supplier base is becoming more or less concentrated over time.

For over-concentrated categories, identify alternative suppliers and establish backup agreements to reduce single-point-of-failure risk. For fragmented categories, consolidate spend with fewer preferred vendors to negotiate volume discounts. Use the analysis to inform contract renewal strategy: vendors representing significant spend deserve dedicated negotiation effort, while tail spend vendors may be better served through a procurement marketplace or purchasing card programme with automated controls.