Suppliers play a critical role in activating a business environment. However, an outstanding supplier should have the proper skills to facilitate useful transactions. So, the unsettling question is; what is the bargaining power of suppliers?
The answer is simple. It is the pressure that suppliers place of various companies, thereby increasing prices and reducing their quality. Alternatively, these suppliers may cause the products to be scarce.
Perhaps unsurprisingly, this commercial tactic is a regular business strategy that will affect a competitive environment. It is a force that will influence how business decisions will alter the flow of business products.
The force can occur in the following forms:
1. Competitive Rivalry
Here, it means that there is a pressure of competition from the industry. When different companies enter the market, the marketing arena becomes more competitive.
2. The threat of New Competitors
A supplier may enjoy the monopoly for a long time. Suddenly, there may be an emergence of a new entrant. The new company will have to outsmart the former for it to perform better. If the latest company continues to soar, it creates rivals.
Buyer’s bargaining power.
The supply may be higher in the market, leading to less demand form the consumers. Consequently, the reduction in prices may follow. Here, the company may decide to end the production to deal with marketing challenges.
The threats of substitutes
Every product has an alternative in the market. If the substitute proves to have a price advantage, it may affect the sales of the leading product.
Types of Suppliers
The simple fact is that a supplier is the one that supplies to companies. There are various types of suppliers depending on the industry as follows:
A manufacturer is a producer of the whole product. Still, the manufacturer may also produce the components that create the final product processing. The manufacturer will have little power whenever the supplied materials are generic or have readily available alternatives.
On the other hand, suppose the manufacturer lacks competing producers or has vital expertise, he will control the value chain. The manufactures will sell his products the producers, wholesalers as well as retailers.
Distributors and Wholesalers
Their primary role is to purchase goods in large quantities from multiple companies. Indeed, they will later sell them to retailers. Notably, they sell their products at a higher price to the retailers than when purchased directly from the manufacturers.
The cool thing is that they will also allow selling products in smaller quantities. They will supply them to local distributors and other clients.
The people in this category will manufacture special items but in small quantities. They will later supply them to their clients through the trade shows or representatives.
The role of the suppliers in this model is to purchase products from international sources and sell to local retailers. In other words, they are the domestic distributors or wholesalers for their products.
Factors that Increase Supply Power
- The switching costs that result from moving to another supplier.
- If they begin to produce the products themselves or when the forward integration is high.
- When the supply is low in comparison to high demand from buyers.
- The absence of substitutes.
- The need for specific technology or expertise to manufacture the goods.
- The presence of influential end users with a great influence over the organization that favors the suppliers. For instance, such cases are common in labor situations.
The scary part is that the suppliers may also experience low bargaining power due to the following reasons:
- When the switching costs of the buyers are low.
- Increased number of suppliers as compared to buyers.
- If the substitutes are readily available.
- The threat that comes from low forward integration.
- When the buyer decides to not depend on sales from the suppliers.
- High reliance on a supplier’s selling to a specific buyer.
How to Manage Suppliers
The suppliers play a crucial role in the supply chain. It is reasonable to maintain a mutual relationship with them. You can use the following strategies when managing suppliers:
Value and Cost
The supplier plays an important part in any supply chain. You should evaluate the importance of that specific supplier to the whole process.
You should develop a mutual relationship with suppliers. For example, you can agree to work and reduce the cost of production that will bring benefits to each one.
A prospective supplier should accept responsibility for all the processes. For instance, one should put orders on time and not alter them unnecessarily afterward.
There should be incentives to increase value creation. You can succeed by optimizing production and ensuring better delivery.
The partners should share critical information concerning the process to avoid delays or unwanted costs. Openness during communication will enhance a better relationship with suppliers.
There should be mechanisms to handle exceptional cases. There should be an elaborate process that handles emergencies to reduce the associated risks.
Proper arrangements should be put in place to avoid the interference of the value chain. If all the parties know how to handle natural calamities, the process will remain smooth.
The partners should strive to treasure honesty in the event of exceptional cases. For example, a prior warning should be timely, as well as the upfront. If the agreement is clear, the supplier should not face any penalties.
There should be periodical meetings that focus on improvement. Moreover, they should harmonize any sticky issues to strengthen the link and reduce misunderstandings.
Powerful Suppliers and the Target Market
When the suppliers have a great influence on the value chain, it determines a lot on how the company will serve the clients. You will notice their power through prices, product quantity and quality.
A company should always be on the safe side by having options unlike remaining in the unfamiliar dictates of suppliers. Let’s discuss these factors in full detail below.
A stable supplier may impose high prices on the goods. A supplier that enjoys the monopoly may maliciously alter the prices in his favor. The action may be ahead of the required timelines for price evaluation.
Whenever the buyer decides to pay for the goods, consequently, the burden will reflect to respective consumers. In other words, the consumer prices will shoot to compensate for the gap. Usually, the target market may initially resist the changes thereby affecting the sales.
Some suppliers may decide to reduce the quality of a product for them to lower the costs. If the quality concern has little impact on the end user’s experience, then complains may arise. As a result, there may be returns. Worst cases may prompt switching to another supplier.
Availability of the Product
The supplier may be unable to meet the demand and this affects the bargaining power of the supplier. Or else, the supplier unwillingly fails to supply enough goods to the market. Such a situation may create a challenge for the company to try and balance the supply and demand.
Example of the Bargaining Power: Fast Food Industry
The role of suppliers in the fast-food value chain cannot go unnoticed. For instance, the chain restaurants depend on the suppliers to get food items, utensils and packaging. The same supplier may be serving the competitors.
Any company wishing to enter the industry must assess the power of a supplier. A dominant supplier can influence the product’s quality, profitability and determine the prices. The bargaining power of a supplier may rise in the following circumstances:
Whenever the supplier enjoys a wide customer base, they have more control over the buyer. The supplier has an option to avoid the buyer who resists his actions to exert control.
If the number of suppliers is low, they will always strive to have more control. You can succeed in the fast-food industry by picking suppliers with numerous products.