canonical/modules/M057-customer-and-supplier-diligence.md

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<!-- Module: 057 | Title: Customer and Supplier Diligence -->

## PART XII - ALTERNATIVE DATA AND CHANNEL WORK | MODULE 057

# Customer and Supplier Diligence

> Mission. Triangulate demand, pricing, product quality, switching behavior, inventory, and competitive share.

## Decision output

Objective: Triangulate demand, pricing, product quality, switching behavior, inventory, and competitive share. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Map the customer/supplier population and choose a sample that reflects concentration, geography, size, channel, tenure, and product exposure relevant to the thesis.

1. For customers, test purchase trigger, ROI, satisfaction, alternatives, switching costs, renewal/expansion, pricing, budget priority, and implementation constraints.

1. For suppliers, test order cadence, lead times, capacity, allocation, cancellations, inventory, pricing, payment terms, customer concentration, and visibility into true end demand.

1. Separate anecdotal experience from measurable frequency or magnitude; one large customer can matter financially but still not represent the market.

1. Cross-check claims with company/peer filings, channel inventory, product availability, pricing, and reported working-capital movements.

1. Document what the evidence can and cannot support and avoid extrapolating beyond the sampled population.

## Required evidence and model bridge

- Primary-source set: documented datasets, sampling frame, legal/compliance approval, backtests, source provenance. Preserve exact document/version, date, period, and source location for every material factual input used in customer and supplier diligence.

- For each key concept - buying process, customer ROI, switching, dual sourcing, discounting, supplier lead times - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as customer and supplier diligence may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| customer dependency | Revenue, gross profit, backlog, or receivables attributable to top customers divided by the relevant total, with renewal/contract timing overlaid. | customer dependency: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| supplier dependency | Spend, input volume, or critical component capacity sourced from top suppliers divided by total requirement, adjusted for qualified alternatives and switching lead time. | supplier dependency: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| switching-cost evidence | Observed retention, migration time/cost, contract penalties, implementation burden, and win/loss behavior synthesized into a documented switching-cost score or quantified range. | switching-cost evidence: Recalculate price/cost from underlying dollars and physical units; test mix, rebates, FX, timing, and unit-definition effects; reconcile to reported revenue or expense. |



## Worked application

> Case: customers like the product but increasingly dual-source it.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For customer and supplier diligence, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through buying process, customer ROI, switching, dual sourcing, then identify which link is directly observed and which link remains an assumption.

- Calculate customer dependency, supplier dependency, switching-cost evidence from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for customer and supplier diligence: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: behavior and contract economics matter more than sentiment.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the customer and supplier diligence conclusion.

## Failure tests

- FAIL if buying process cannot be defined and reproduced from the source pack.

- FAIL if a small or biased customer/supplier sample is generalized to the whole market without exposure weighting, segmentation, and competing explanations.

- FAIL if the customer and supplier diligence conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the customer and supplier diligence conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the customer and supplier diligence conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.