How can a concentration of suppliers benefit firms?

A concentration of suppliers can benefit firms primarily by reducing costs through proximity. When suppliers are located close to the firms that use their products or services, it can lead to lower transportation costs, shorter lead times, and more flexible supply chains. This geographic closeness often facilitates quicker deliveries and can enhance communication and collaboration between firms and their suppliers.

Additionally, being in close proximity can allow firms to receive just-in-time supplies, minimizing inventory holding costs. Overall, the efficiency and cost savings associated with local sourcing can significantly impact a firm's profitability and operational effectiveness.

On the other hand, increasing transportation costs, while a possible consequence of certain supply chain decisions, would not typically represent a benefit of supplier concentration. Increasing competition among suppliers may occur with a larger supplier base rather than a concentrated one. Limiting supplier diversity could lead to vulnerability and risks, rather than a benefit, as it may restrict firms' options and flexibility regarding sourcing strategy.