Power of supplier
From CEOpedia | Management online
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Power of supplier, from the point of view of management, is the ability of the supplier to influence the terms of the exchange, such as price, quality, delivery, and other elements of the transaction. It is the extent to which the supplier can dictate the terms of the exchange, and the buyer is unable to negotiate or modify those terms. Power of supplier is determined by the size of the supplier and the availability of substitute products or services. It also depends on the value of the product and the market dynamics.
Example of power of supplier
- The high power of suppliers is seen in the oil industry, which is dominated by a few large firms. The limited number of suppliers and the high cost of switching to another supplier give them the upper hand in terms of setting prices and terms of delivery.
- In the retail industry, suppliers of consumer goods have considerable power. Many retailers rely on the same suppliers for a large portion of their inventory, giving those suppliers the ability to set prices and delivery terms.
- In the electronics industry, suppliers of components and raw materials can have significant power, as they have the ability to dictate terms to the manufacturers of consumer electronics.
- In the food industry, suppliers of fresh produce and meat have a great deal of power, as they have the ability to set prices and delivery terms due to the perishable nature of the product.
When to use power of supplier
Power of supplier can be used in a variety of ways in management. It can be used to:
- Negotiate better terms for the buyer, such as price, quality, delivery, and other elements of the exchange.
- Gain competitive advantage over competitors by obtaining better terms and pricing than they can.
- Reduce costs of the transaction by obtaining better terms than the market would normally dictate.
- Obtain better quality of the product or service.
- Increase market share by leveraging the supplier's capabilities and resources.
- Reap the benefits of economies of scale by consolidating orders and negotiating better terms.
- Strengthen supplier relationships by developing trust and mutual understanding.
- Maintain a more stable supply chain by reducing the risk of supply disruption.
Types of power of supplier
The power of suppliers can be divided into 4 main categories:
- Leverage: Leverage is the ability of the supplier to impose terms on the buyer. It is determined by the size of the supplier and the availability of substitute products or services.
- Price: Price is the amount of money that a buyer pays for the product or service. The supplier has the power to determine the price of the product or service.
- Quality: Quality is the degree to which the product or service meets the buyer's expectations. The supplier has the power to determine the quality of the product or service.
- Delivery: Delivery is the process of delivering the product or service to the buyer. The supplier has the power to determine the time frame and the method of delivery.
Advantages of power of supplier
The power of supplier can be advantageous for a business in many ways. It can provide leverage in negotiations and can also reduce the risk of a supplier not meeting its obligations. Here are some of the advantages of having a powerful supplier:
- Lower Costs: Having a powerful supplier can enable businesses to access lower costs for their products or services, as the supplier may be willing to negotiate lower prices due to the power it has in the market.
- Quality Products: Having a powerful supplier can ensure businesses get high-quality products, as the supplier is more likely to provide better products due to its market position.
- Access to New Markets: Having a powerful supplier can enable businesses to access new markets and expand their business operations, as the supplier may be able to provide access to new customers.
- Reduced Risk: Having a powerful supplier can reduce the risk of not meeting the obligations of the contract, as the supplier will be more likely to fulfill their obligations due to their market position.
- Improved Negotiations: Having a powerful supplier can give businesses leverage in negotiations, as the supplier may be willing to negotiate more favorable terms due to the power it has in the market.
Limitations of power of supplier
The power of supplier is limited by several factors. These include:
- The availability of substitutes. If there are a range of alternative products or services that can be acquired from different suppliers, then the power of the supplier is reduced.
- The level of competition. Higher levels of competition in the market reduce the power of the supplier.
- The size of the buyer. Larger buyers typically have more bargaining power and thus reduce the power of the supplier.
- The cost of switching suppliers. If it is expensive or time-consuming to switch suppliers, the supplier has greater power.
- The price of the product or service. If the price is high, then the supplier has greater power.
- The buyer's knowledge. If the buyer has extensive knowledge of the product or service, they can negotiate better terms and reduce the power of the supplier.
- The buyer's preferences. If the buyer is not willing to compromise on certain elements of the transaction, then the supplier's power is reduced.
Suggested literature
- Kumar, N. (2005). The power of power in supplier-retailer relationships. Industrial marketing management, 34(8), 863.
- Inderst, R., & Wey, C. (2007). Buyer power and supplier incentives. European Economic Review, 51(3), 647-667.
- Yeung, J. H. Y., Selen, W., Zhang, M., & Huo, B. (2009). The effects of trust and coercive power on supplier integration. International journal of production Economics, 120(1), 66-78.
