Supplier Power
It is the level of influence a provider of raw materials or products has on businesses
What is Supplier Power?
Supplier power is the level of influence a provider of raw materials or products has on businesses. By increasing their pricing, diminishing their quality, or limiting the availability of their products, suppliers with solid bargaining power may exert pressure on these businesses.
This idea is a fundamental element of a supplying company's strategy.
If a company requires glass to make a product, for instance, and there is only one seller in the market, the glass company will have significant supplier power. However, if there are several suppliers, then each one of them has less influence than if there were only one.
The provider's negotiating strength in a particular sector impacts the buyers' competitive climate and profit potential. The power dynamic in many businesses is dramatically moving from buyers to suppliers.
Usually, buyers have significant negotiating power since they collaborate with several others in the same place. These buyers may become even more powerful if there are substantial hurdles to entry.
This might be due to a product or service having a patent, being unique, being legally prohibited from getting copied, high R&D expenditure requirements, or other factors.
When switching distributors is expensive for the customer, or if the buyer's account is unattractive to other suppliers, they may also develop supplier power.
Porter's Five Forces
Porter claims five forces are the primary sources of competition within a given business.
1. Competition in the industry
The number of rivals and their capacity to undercut a firm is the first of the five forces.
The degree of competition your business confronts is the first factor to be examined. Consider your industry's total number of direct rivals and their comparative offerings of goods and services on both a macro and local level.
The power of a corporation decreases as the number of rivals and the number of comparable goods and services they provide increases. Therefore, customers are likelier to switch if a competitor can provide a better deal or cheaper rates.
On the other hand, when there is less competition, a corporation has more negotiating power and can raise prices to boost sales and profits.
2. Threat of New Entry
The force of new entrants into a market has an impact on a company's power as well. An established company's position may be considerably undermined the quicker and cheaper it is for a rival to join its market and become viable.
This force is less threatening for existing enterprises inside an industry with significant entry barriers allowing these companies to charge higher rates and negotiate better conditions.
A company vulnerable to competition from new entrants may opt to patent its technology, reduce prices to make its products more affordable, or find other methods to stand out from the competition by promoting its unique characteristics and advantages.
3. Threat of Substitute
Businesses worry that competing goods or services might supplant their own. When firms or competitors outside the sector provide more alluring and/or less expensive items, there will be a greater risk of replacement. As a result, buyers may trade off performance for price or vice versa.
Another consideration is the expense of switching. If it is high, there is less risk of replacement.
4. Power of Customer
One of the five most important factors is the customer's power or capacity to influence price reductions. This factor is influenced by the quantity and value of a firm's customers and how expensive it would be for a company to find new markets or consumers for its goods.
Each consumer has greater leverage to bargain for cheaper rates and better offers if the client base is small. It will be simpler for a business with many small, independent clients to raise pricing and boost profitability.
You must take precautions even if your interactions with big buyers are positive. Keep in mind that whether or not they utilize their power right now, prepare to avoid considerable future losses.
5. Power of Supplier
As previously mentioned, the ability of a single supplier to influence market prices in their favor is known as supplier power. A particular provider's influence over purchasers in the market might vary depending on several factors.
When a product is supplied by just one or a small number of providers, they may be able to exert more influence.
Types of Suppliers
- Manufacturers and vendors
- Wholesalers and distributors
- Independent and tradeshow reps
- Importers
How Can Supplier Power Be Reduced?
Ways to reduce are:
1. Provide Benefits to Your Provider
The most straightforward course to follow is redefining your provider's connection by adding value. By demonstrating your worth to your supplier, you may not only rebalance the power dynamic but also turn a business deal into a productive collaboration.
- Become a gateway to new markets: One of the most cost-effective solutions to solve a power imbalance issue is to open up new markets for your provider. They will view your relationship as including more than simply the financial benefits your company delivers on its own.
- Reduce their risks: If your firm is positioned to reduce the chances that its vendors face, it may be able to bargain for lower costs in return.
2. Alter the Way You Buy
Purchase Order Consolidation: The consolidation technique entails risk but has the potential for success if many divisions of a company used to buy components from a single significant supplier individually.
Example :
A supplier decided to double the costs in its initial quote to a specific business.
Remember that all the divisions of that business depended solely on them for raw materials, but the individual groups lacked the significant influence to alter the negative behavior.
The various unit heads thus got together, combined their expenditures, and went to the senior executive of the supplier, threatening to halt all purchases if no adjustments were made. The only alternative left to the provider is to lower the pricing.
Reduce the volume of purchases:
Reduce the amount of merchandise you buy as another strategy to alter your buying habits. This process can be accomplished by switching to a replacement, inexpensive resource or raw material.
Vendors are more likely to be receptive to negotiating better terms if they demonstrate that they are prepared to do this.
3. Establish a New One
Producing a brand-new supply source is your greatest option if changing your demand is no longer achievable. But unfortunately, this strategy pushes demand away from your present provider, just as it did with the last two options.
The best action is to use this strategy when one provider discourages other vendors from conducting business.
4. Take a Hard Line
If none of those above tactics convinces your supplier to reevaluate its price policy, you might have to utilize harsh tactics. This strategy can be accomplished by halting all purchases, excluding them from future deals, or taking legal action.
One or more of the abovementioned strategies may be used to persuade suppliers to enter negotiations.
When Is Supplier Bargaining Power High Or Low?
Supplier bargaining power is high when:
- Switching costs for buyers are high
- The risk of forwarding integration is high (a company's operations might be expanded to include the direct distribution of its products as part of a forward integration business plan)
- There are few providers in relation to customers (customers being the businesses buying from the wholesalers or inventory sellers)
- Low reliance on a particular customer for a distributor's sales is low.
- There is a lack of substitutes
- A buyer depends substantially on supplier sales
Supplier bargaining power is low or weak when what is mentioned above is the opposite.
Researched and authored by Chadi Kattoua | LinkedIn
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