Bargaining power of suppliers

From CEOpedia | Management online

The bargaining power of suppliers is a competitive force that can reduce its efficiency by raising prices or reducing the quality of the supplier's product. In many cases, profits are reduced, so that the company can not recover costs from raw materials. It is the difference of inpuls and matrix when input and matter when the organization process needs a rare commodity. When the costs of switching to an alternative supplier are high, suppliers are relatively powerful, because the organization would have to incur significant costs if it left them. When substitute suppliers are available, the supplier's power decreases. The higher the concentration of suppliers, the higher the supplier's strength. If suppliers have to achieve high sales, then they have less bargaining power. The supplier's power is low when the costs of the delivered goods are high in relation to the total costs of the purchasing industry. The strength of the supplier is significant for the buyer's chances of differentiating products. When suppliers will have easy integration with the buyer's industry, they will have bargaining power.

Conditions increasing Bargaining Power of Suppliers

The conditions that increase the strength of the supplier are a concentrated group of suppliers, no substitute products available, the industry is an irrelevant customer for the supplier, the supplier's product is essential for the sector's activity, the supplier's product is diversified and the legitimate threat of its further integration.

  • If industry suppliers are concentrated, then the supplier has more bargaining power in the industry. Suppliers of chocolate and cocoa have significant bargaining power in the industry due to the limited number of these suppliers. Because the cocoa tree is grown in areas that have a tropical climate, many players in the industry are forced to import the product. Tropical climates often pose a risk of natural disasters, such as hurricanes, which significantly reduce the number of suppliers. In addition, social unrest in the areas where the cocoa tree is located can have a negative impact on the number of suppliers for the industry. The bargaining power of industrial suppliers increases due to the limited number of these suppliers.
  • In addition to concentrated suppliers, the bargaining power of the group of suppliers is increased if there are no substitute products that they have to deal with in the market.Since cocoa beans is a required component in the chocolate industry and cocoa suppliers do not have any substitute products, which have to fulfill . This lack of substitutes increases the bargaining power of chocolate and cocoa suppliers.
  • The supplier's bargaining power increases because the industry is not an important customer of the supplier. Chocolate and cocoa industry is a very important client of its group of suppliers . The cocoa is an important export of countries producing cocoa beans. The bargaining power of suppliers is diminishing due to the important role of the chocolate and cocoa industry as a customer.
  • Another condition that increases the bargaining power of a group of suppliers is the dependence of the industry product on the supplier's product. If the product provider is not available or does not meet the expected quality, the industry relies on suppliers to provide products with high quality, compliance with the provisions of food and consumer taste test. If the product provider is not available or does not meet the expected quality, the industry suffers a lot. This dependence on the supplier's product increases the bargaining power of the supplier.
  • Bargaining power of a group of suppliers increases if the product supplied is varied or costs associated with the conversion. If there differentiation or switching costs, the industry has a limited ability to increase competition between suppliers. It is important that the product provider or a specific quality class. however, if the product meets the class guidelines, it is relatively undifferentiated. This applies to all industry suppliers, including suppliers of cocoa beans, milk and sugar.
  • In addition, the bargaining power of the supplier increases if the supplier can threaten the integration. If a supplier can become a producer of a special product, then he can increase his bargaining power. Suppliers of the product industry do not pose a reasonable threat to integration. As already mentioned, the market entry threat is low. Suppliers will have to spend a considerable amount of money on research and development, capital demand and acquisition of customer contacts. They will also have to overcome strong industry leaders who have significant brand identification and customer loyalty. the lack of threat to future integration reduces the bargaining power of the supplier. The supplier's bargaining power has decreased because the industry is an important client of the supplier group and the supplier does not pose a threat of integration. but the bargaining power of the supplier is moderate to high, because the group of suppliers is specific, they are the naive products and the importance of the supplier's product to the industry.

Examples of Bargaining power of suppliers

  • Automotive parts suppliers: Automotive parts suppliers have considerable bargaining power in the auto industry, as they are able to set the prices of their parts, which can make or break the profitability of an auto manufacturer.
  • Pharmaceutical Industry: Pharmaceutical companies often have significant bargaining power over suppliers, as they can demand lower prices and higher quality standards from producers. This can lead to reduced profits for suppliers, as they must meet these demands in order to stay competitive.
  • Food Industry: Food suppliers have considerable bargaining power in the food industry, as they are able to dictate the prices of their products. This can lead to reduced profits for food producers, as they must adhere to the supplier’s pricing in order to stay competitive.
  • Retailers: Retailers have considerable bargaining power in the retail industry, as they are able to set the prices of their products. This can lead to reduced profits for suppliers, as they must adhere to the retailer’s pricing in order to stay competitive.

Advantages of Bargaining power of suppliers

The bargaining power of suppliers can be a great advantage for companies in certain situations. Some of the main advantages of this power include:

  • Increased efficiency when suppliers are willing to negotiate on prices and quality. This can lead to reduced cost of production and increased profits.
  • The ability to secure better terms and conditions from suppliers, such as discounts or special payment terms. This can help improve cash flow and provide greater flexibility in order to meet changing market conditions.
  • The ability to access new suppliers or materials, which can bring fresh ideas to the business and open up new opportunities.
  • The ability to negotiate long-term contracts, which can provide price stability and reduce the risk of sudden price increases. This can also help to reduce the cost of capital and improve the competitiveness of the business.

Limitations of Bargaining power of suppliers

The bargaining power of suppliers is an important competitive force that can put pressure on the company's profits and efficiency. There are various limitations to the bargaining power of suppliers, such as:

  • The availability of substitutes - if suppliers are unable to meet the demand or are too expensive, then companies can turn to other suppliers who will offer a better bargain.
  • The threat of forward integration - suppliers may threaten to enter the market as competitors, which could reduce the company's profits and force them to pay higher prices.
  • The size and concentration of the supplier market - if there are many suppliers, they will be less likely to act as a collective and exert bargaining power.
  • The bargaining power of buyers - if buyers have strong bargaining power, they will be able to push down prices, which will limit the suppliers' ability to negotiate.
  • The cost of switching suppliers - if the cost of switching suppliers is too high, it may be difficult for the company to find a better bargain.

Other approaches related to Bargaining power of suppliers

In addition to raising prices and reducing product quality, there are other approaches to the bargaining power of suppliers. These include:

  • Forming strategic partnerships with suppliers, which can make it easier to negotiate better prices and terms.
  • Developing long-term relationships with suppliers to ensure that supply chain is stable and secure.
  • Increasing vertical integration in order to reduce reliance on external suppliers.
  • Leveraging economies of scale to increase purchasing power.
  • Utilizing technology to improve the efficiency of the supply chain.

Overall, there are various approaches to increase bargaining power of suppliers and ensure cost-effective, reliable and stable supply chain. These approaches can help companies to reduce the cost of production, increase profits, and improve customer service.


Bargaining power of suppliers — recommended articles
International competitiveness — Power of supplier — Price-Taker — Cost advantage — Competitive rivalry — Low cost strategy — Threat of substitutes — Factors affecting pricing — Economies of scale

References

Author: Justyna Galon

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