BARGAINING POWER OF SUPPLIERS: What It Is & How It Works

When suppliers have bargaining power, they can put pressure on a company by raising pricing, changing product quality, or limiting availability and delivery schedules. Within Porter’s five forces that shape an industry’s competitive position, it is recognized that when suppliers have negotiating power, they can impact the competitive environment and directly impact a company’s profitability. Read further to understand the bargaining power of suppliers with an example.

What Is The Bargaining Power Of Suppliers?

The bargaining power of suppliers is a competitive advantage gained by vendors, wholesalers, and distributors when an industry structure directs the bulk of customers to a small number of enterprises. When the total number of suppliers declines, the bargaining power and profitability of existing companies grow.

They can even decrease the availability of their products. The framework is an essential component of corporate strategy. This has an impact on the competitive environment. and the profit potential of purchasers. Other variables, for example, include the bargaining power of suppliers and the prospect of new entrants.

Various Types of Suppliers

Suppliers are classified into numerous groups based on their industry. They are the following

• Manufacturers and Vendors: Distributors, retailers, and/or wholesalers are the customers to whom they sell their products.
• Distributors and wholesalers: They buy products in large numbers with the intention of reselling them to merchants or distributors in their immediate area.
• Independent Suppliers: They sell one-of-a-kind products to retail stores directly.
• Importers and exporters: They make the purchase of a product in one nation and then export it to another.
• Drop Shippers: Companies that provide a variety of businesses with their goods as suppliers.

Determining Factors

When measuring a supplier’s bargaining strength, there are five primary criteria to consider

• The number of suppliers as compared to the buyers
• How much a buyer is dependent on a supplier’s sale
• The switching costs of the suppliers
• Availability of suppliers for immediate purchase
• Possibilities for forwarding integration by suppliers

What Is the Bargaining Power of Suppliers—Strong or Weak?

Strong:

• The switching cost for buyers is high.
• The threat of forwarding integration is high.
• The suppliers are fewer in comparison with the buyers.
• The low dependence of a supplier’s sales on buyers.
• The switching cost of suppliers is low.
• Substitutes are unavailable.
• Buyers heavily rely on sales from suppliers.

Weak:

• The switching cost for buyers is low.
• The threat of forward integration is low.
• The suppliers are more in comparison with the buyers.
• The high dependence of a supplier’s sales on buyers
• The switching costs of suppliers are high.
• Substitutes are available.
• Buyers do not rely heavily on sales from suppliers.

An Example of the Bargaining Power of Suppliers

The following is an example of the bargaining power of suppliers in a case study that can be used to illustrate bargaining power:

SkyMiles is an electric automobile company with operations in five countries: the United States, France, Germany, Canada, and South Korea. SkyMiles uses lithium, which is an active material in car rechargeable batteries, for its luxurious, cutting-edge vehicles. The company also gets its lithium from StarCrown, a company based in Australia. SkyMiles has attempted to negotiate with other suppliers in Chile and China, but no formal partnership has been established. Skymills’ sole source of lithium is still StarCrown. In this situation, Starcrown’s bargaining leverage over SkyMiles can be summarized as follows:

#1. The Number of Suppliers in Relation to the Number of Buyers

Because there is only one supplier in this supplier power scenario, StarCrown’s bargaining power is as close to maximum as possible in the industry.

#2. The Impact of a Supplier’s Sale on a Specific Buyer

SkyMiles does not exclusively supply lithium to StarCrown. It also has other customers in the electric vehicle business, as well as a number of partner organizations that purchase lithium for use in mobile phone production. To put it another way, StarCrown’s reliance on SkyMiles is minimal.

#3. Buyer’s Costs of Switching

Apart from StarCrown, SkyMiles does not have access to any other providers. This means that transferring to a new supplier will be costly and time-consuming, giving Starcrown an advantage against SkyMiles in terms of supplier power.

#4. Integration in the Forward Direction

The strong forward integration in the lithium industry enhances StarCrown’s negotiating power as a supplier, implying that StarCrown needs Skymills significantly more than StarCrown requires Skymills.

Factors That Increase the Power of Suppliers

Suppliers may have additional bargaining power as a result of the following factors: If there are a lot of them in comparison to purchasers.

• If switching to a different supplier comes with hefty switching fees.
• If they can integrate or start producing the product on their own.
• If they have the necessary skills or technology to produce things.
• If their product has a lot of unique features.
• If there are a lot of buyers but none of them account for a major percentage of sales.
• If no other options are available.
• If there are powerful end-users who can influence the organization in a supplier’s favor (this can be the case in labor situations).

Suppliers have strong bargaining power in all of these circumstances, allowing them to demand premium prices and set their own timelines.

Aspects That Influence Suppliers’ Bargaining Power

Like buyers, suppliers’ ability to maximize their profits depends on their strength relative to the firm’s strength. Suppliers have great bargaining power if:

• Input substitution is difficult for businesses. As a result, businesses must rely on deliveries from their current suppliers.
• For the supplier, the corporation is not a significant customer. Suppliers’ revenue and earnings are unrelated to sales to the company or other industry participants; they only contribute a small amount. Suppliers provide to a wide range of sectors.

• We have a few vendors. Consider a supplier in a few-competitor oligopoly. The company competes in a vast monopolistic market. The supplier has stronger bargaining power over price, quality, and sale terms. Corn or soybean suppliers have bargaining power. They have minimal bargaining power, for example, because suppliers come from many farms. Few firms have requested it.

• Supplier items are critical to the company’s success. Its quality is superior to that of other suppliers. Its supply has a significant impact on the company’s output production and quality. Of course, this boosts suppliers’ bargaining power. If the input cannot be stored for a long time, the suppliers’ bargaining power is greater. Companies can’t collect inventory in warehouses to prepare for supply disruptions.

• The input from vendors varies greatly. As a result, switching costs are considerable. Due to the uniqueness of the inputs, companies find it difficult to move to providers for similar services. Alternatively, they must face hefty fees when switching to alternative suppliers.
• Suppliers have the credibility to use a forward vertical integration strategy to threaten the company. In other words, the supplier could stop delivering inputs and enter the business, making the company a direct rival.

Why Is the Bargaining Power of Suppliers Important?

Suppliers use their significant bargaining power to squeeze the company’s and other industry participants’ profits. Suppliers might put the company at risk by raising prices or lowering the quality of goods and services purchased. They can also impose stringent credit collection policies. Inadequate supplies of inputs to manufacturing plants can also interrupt business operations.

Profitability pressures become more severe if, for example, enterprises are unable to pass on input prices to selling prices. As a result, businesses must suffer increased operating costs and lower profit margins. In contrast, if the supplier is weak, the corporation may be able to negotiate a cheaper price. Alternatively, the corporation may want higher quality input and more favorable loan terms. Companies might ask employees to be more productive in exchange for labor input. If they are unable to do so, the employer may terminate them and replace them with another employee.

Furthermore, aside from being dynamic, suppliers’ bargaining power is frequently beyond their control. As a result, in some industries, corporations can only adjust without the ability to bargain with their suppliers.

The Target Market and Powerful Suppliers

The supplier’s choice of bargaining power is different. All costs, quality of products, and quantity available must be reflected. As a result, too much disruption in any of these areas may result in a company’s inability to stay in business.

A company’s operations may need to be stopped or shifted to a different industry. As a result, you won’t be ruled by the desires of a supplier.

#1. Pricing

The first issue that a company must deal with is rising costs. When a supplier realizes they can’t be removed, they may boost the price of their raw material. It’s also possible that it’s ahead of schedule. Assume that the buyer has no other option but to pay these rates. In that instance, the increase in total production costs will either have to be absorbed or passed on to the customer. It’s also possible to pass it on to the customer. The company’s profit margin may not be able to withstand this strain. Then market prices will rise as a result. Because the target market may be resistant to the change, sales may suffer. As a result, clients may defect to a competitor’s product or substitution.

#2. Product/Supply Availability

Let’s say a supplier refuses or is unable to achieve volume targets. In that instance, the corporation may have to deal with an overabundance of demand. As a result, this might occur in both normal and abnormal conditions if the corporation wishes to raise sales. As a result, it’s possible that it’ll happen during peak sales periods. Holidays and other special occasions are examples of when consumers are more likely to buy more things.

#3. Problems with Quality

Occasionally, the supplier will opt to lower the product’s quality. As a result, this is done in order to reduce costs. This will have a direct impact on the company’s product lineup. Furthermore, if there are substantial-quality difficulties, it may have a negative impact on the final consumer. As a result, returns, complaints, and exchanges may increase. Consumers may decide to switch to a different product entirely.

#4. Industry Dynamics Dictate

Assume that a single large supplier decides to supply only individual businesses. In that instance, it may be able to force businesses out of the industry. A corporation will be defenseless and unable to defend itself in these situations. Assume the product is wholly manufactured by a provider. In that instance, they may opt to design and sell the product directly to the consumer, often at a lower cost.

#5. Supplier Power Mitigation

Companies will aim to diminish suppliers’ bargaining power if they grow too strong in the market. Assume that there is sufficient demand for the product. In that instance, there may be opportunities to find new ways to manufacture or market a product. As a result, supplier power is diminished. Another option is to redesign the product or diversify the product range.

What factors affect bargaining power?

The key buying criteria of buyers (such as price, quality/reliability, service, convenience, or any mix of these), price sensitivity or elasticity, switching costs, and their number and size in relation to the number and size of suppliers, all affect their relative bargaining power.

How do you overcome supplier bargaining power?

Backward integration is one of the strategies used frequently today to weaken suppliers’ negotiating positions. Backward integration is the process through which a company buys its suppliers to lower supply chain volatility or establish a monopoly in its market.

How does bargaining power work?

The ability of parties to influence, convince, or win an agreement with terms that best meet their goals is referred to as “bargaining power.” Each party’s ability to negotiate depends on a variety of variables that can change over time as a result of evolving situations.

What are the four types of bargaining?

Composite bargaining, concessionary bargaining, distributive bargaining, integrative bargaining, and productivity negotiations are the five primary categories of collective bargaining.

Why is bargaining power important in business?

The pressure that customers or consumers can apply to firms to persuade them to deliver higher quality products, better customer service, or lower pricing is referred to as the bargaining power of buyers, one of the factors in Porter’s Five Forces Industry Analysis framework.

Bargaining Power of Suppliers FAQs

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