How does it affect your business and how can it be minimized?
Knowingly or unknowingly, most procurement professionals are affected by the concept of the bargaining power of suppliers. Some of them are not aware of the concept, while the rest are not familiar with how it impacts their businesses.
If you are new to this, the bargaining power of suppliers is one of the forces in Porter’s Five Forces Industry Analysis Framework which was introduced by a Harvard professor, Micheal Porter.
This framework mirrors the image of the bargaining power of buyers and attributes to the stress that suppliers can put on enterprises by increasing their costs, reducing their product or service quality, and diminishing the availability of their products. Now, this concept is a pretty standard part of any business strategy.
This analysis of the bargaining power of suppliers can assist enterprises in understanding the degree to which they are dependent on their suppliers and how weak they are in changing the supplier ecosystem.
Just in case, an enterprise’s suppliers are enjoying a high bargaining power, then it wouldn’t be a very good scenario for the enterprise. The suppliers can either increase the prices of their products or change the delivery terms and conditions as they please, which of course will have dire consequences on the business operations.
If you take out the competitive analysis side of the bargaining power of suppliers and apply it to any business and its suppliers, a fundamental understanding and analysis of their suppliers’ bargaining power will surely assist the enterprise’s procurement team in taking effective measures to minimize or even eliminate it completely.
In this article, we will first understand what creates this power, how it impacts an enterprise or business, and how procurement experts can take the required measures to tailor the enterprise’s approaching method to counter such situations with suppliers.
What causes the bargaining power?
Well, there could be a variety of reasons what create this level of bargaining power. However, below are the most common ones.
1. Number of suppliers available
The number one reason that causes the bargaining power in the first place is the number of suppliers who can meet the business’s needs and demands. When an enterprise chooses a supplier from a pool of suppliers, the supplier’s bargaining power will be relatively low, and vice versa. In other terms, suppliers in a monopoly or oligopoly market may have high bargaining power when compared to the suppliers who are chosen by the enterprise from a competitive environment.
2. Over dependency
Once the suppliers met the business needs and demands and if the suppliers lived up to their expectations, enterprises tend to propose and enter into long-term contracts with those suppliers. And this dependency is what exactly gives their suppliers high bargaining power and very little flexibility.
3. Changing suppliers
Changing suppliers is another potential reason for bargaining power. If the enterprise decided to change from one supplier to another, it could cost them a lot of money. Usually, such expenses include the cost of setup and configuration, legal costs, infrastructure costs, and many more. This could give the new supplier a lof bargaining power if their products’ quality is much superior to the earlier one or even if there aren’t too many suppliers who can meet the demands of the enterprise.
Also Read: Contracts Management: Why You Need It
Backward integration is one of the popular techniques that businesses utilize to minimize the bargaining power of suppliers. In this process, the enterprise basically will acquire its suppliers to minimize the volatilities in the supply chain or sometimes even create a monopoly in the industry. When the enterprise starts to control its own suppliers, the disruption in the supply chain also reduces along with the bargaining power of suppliers. One classic example of this technique is a restaurant or food business acquiring farms. This can also greatly enhance the efficiency of the supply chain which further leads to cost savings.
No matter what product or service the supplier provides, when there is only one supplier for a business, that supplier obviously will like a lot of power. When businesses tend to diversify and spread their purchases around, they can minimize suppliers’ bargaining power. With this, you are clearly telling your supplier that if there are any issues during the process, you have other suppliers who are willing to do business with you.
Not every business will have the luxury of multiple suppliers providing the same product or service. This is the other side of the above point, not having suppliers. If that’s the case for you, then try your hand at being the dominant player in the industry by improving your business profile. Bulk procurement may also assist you in this case. Usually, suppliers don’t tend to offend or antagonize their bulk buyers.
If your products can do the same job and meet your users’ expectations and their needs even with replacements, then you should consider them. If your business has the advantage to choose substitutes or replacements, you can utilize them in the place of usual raw materials.
Stay up-to-date on Market Trends
Every day, the market changes. If your suppliers are enjoying a high bargaining power, instead of submitting to their demands or changing them, make yourselves familiar with the market or its changes and recent trends. By doing this, you will know exactly what is happening in the market and industry and also prevent doing things that your suppliers are asking you to do.
The bargaining power of suppliers alone cannot define how the industry is doing. Apart from the ones mentioned, there are various other forces too. Any business should maintain its relationship with suppliers as a strategic negotiation so that it can meticulously research and plan effective ways to do business with suppliers for the long run.