Bargaining Power of Suppliers

Updated on March 5, 2024
Article byGayatri Ailani
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Bargaining Power Of Suppliers?

The bargaining power of suppliers refers to the ability of suppliers to influence the terms and conditions of a business relationship with their buyers. The aim of analyzing the bargaining power of suppliers is for businesses to understand the level of influence suppliers have over their operations and costs.

bargaining power of suppliers

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Suppliers with strong bargaining power can demand higher prices for their products or services, potentially increasing the cost of production for the buying company. This, in turn, affects the company’s profitability and pricing strategies. In other words, a supplier with significant power might limit the supply or prioritize other customers, causing disruptions in the buyer’s operations and smooth functioning.

Key Takeaways

  • The bargaining power of suppliers represents the level of control suppliers have over the businesses or customers that purchase goods or services from them.
  • A supplier with high bargaining power can demand higher prices, impose stricter terms, or reduce the availability of products, putting pressure on the buying company. On the other hand, when suppliers have low bargaining power, buyers have more negotiation control and can expect better.
  • It is crucial for businesses as it helps them make informed decisions about supplier management, pricing strategies, and risk assessment in their supply chain.

Bargaining Power Of Suppliers Explained

The concept of the bargaining power of suppliers is a key element of Porter’s Five Forces framework, a strategic tool used to analyze the competitive forces that influence an industry’s attractiveness and profitability.

The Five Forces in Porter’s framework are as follows:

The bargaining power of suppliers refers to suppliers’ ability to influence the terms and conditions of a business relationship with their buyers. Suppliers with significant bargaining power can exercise their influence in various ways:

  • Price Setting: Suppliers with high bargaining power can demand higher prices for their products or services, potentially impacting a buyer’s costs and profit margins.
  • Terms and Conditions: Powerful suppliers may impose strict terms and conditions on their buyers, affecting contractual agreements, payment schedules, or delivery requirements.
  • Availability of Resources: If suppliers control essential or unique resources, they can limit the availability of those resources to buyers, potentially causing disruptions in production or service delivery.
  • Switching Costs: Suppliers can influence buyers by making it costly or challenging for them to switch to alternative suppliers.

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How To Determine?

In order to determine the bargaining power of suppliers, businesses can conduct a comprehensive analysis by considering various factors and conducting thorough research. Here’s a step-by-step approach:

  • Identify Key Suppliers: Identify the suppliers that provide critical inputs or services for the business operations. These could include raw materials, components, technology, or specialized services.
  • Research Market Structure: Assess the market structure to understand the number of suppliers operating in the industry. A concentrated market with a few dominant suppliers may indicate higher supplier bargaining power.
  • Supplier Concentration: Determine the market share and dominance of each supplier. Suppliers with a significant market share often have more bargaining power.
  • Uniqueness of Products or Services: Evaluate whether the products or services the suppliers provide are unique, specialized, or readily available from other sources. Unique offerings can give suppliers greater bargaining power.
  • Availability of Substitutes: Identify if there are readily available substitutes for the products or services the suppliers offer. The availability of substitutes may reduce supplier power.

Examples

Let us look at the bargaining power of supplier examples to understand the concept better –

Example #1

Imagine a small coffee shop getting its coffee beans from local suppliers. The owner wants to know how much influence these suppliers have. After checking, there are only two local bean suppliers in the area. Supplier A has 60% of the market, and Supplier B has 40%. Supplier A has special coffee beans that others don’t, which helps them stand out. However, a few other regional suppliers with basic beans offer alternatives. It’s not too hard for the coffee shop to switch between Suppliers A and B or regional suppliers because of flexible contracts.

Supplier A’s high-quality beans and reputation bring customers to the coffee shop. So, the coffee beans from Supplier A are important. Supplier B is open to discussing prices and delivery terms to keep the coffee shop as a customer.

Looking at everything, the coffee shop owner decides Supplier A has more power because of unique products, reputation, and importance. The owner plans to keep good relations with suppliers and check out other regional options for basic beans to be safe. This way, the coffee shop can handle supplier power well and keep its supply chain steady and affordable.

Example #2

Samsung is a big supplier of special OLED screens used in iPhones. They’re known for great quality screens that many smartphone makers want. Because of this, Samsung has a lot of power in this situation for a few reasons:

  • Unique Product: Samsung’s OLED screens are good, come with bright colors, good contrast, and less power use. This makes them a top choice for fancy phones.
  • Not Many Choices: Only a few companies can make OLED screens as good as Samsung’s, so there aren’t many other options for Apple.
  • Hard to Change: If Apple wanted to use a different kind of screen, they’d have to change a lot in their phones. This takes time and money, so switching to a different supplier is not easy.

Samsung has so much power. Hence, Apple has made deals to get a steady supply of Samsung’s OLED screens. Apple is also working on making its own OLED screens to rely less on Samsung. This example shows how a supplier’s special products, few alternatives, and important role can affect their power over a big customer like Apple.

Threats

The threats posed by the bargaining power of suppliers can have significant implications for businesses and industries. Some of the key threats include:

  • Increased Input Costs: Suppliers with high bargaining power can demand higher prices for their products or services, increasing business production costs. This can directly impact a company’s profit margins and financial performance.
  • Limited Supply: If suppliers have limited capacity or resources, they may prioritize larger or more lucrative customers, leaving smaller businesses with inadequate supply, delays, or even supply shortages.
  • Dependency and Reliance: Overreliance on a single or a small group of suppliers with significant power can make a business vulnerable to sudden pricing, availability, or quality changes. This dependency can lead to disruptions in the supply chain.
  • Lack of Innovation: Suppliers with strong bargaining power may be less motivated to innovate or invest in new technologies or products, potentially limiting a business’s access to cutting-edge solutions.
  • Quality and Performance Issues: Suppliers with weak competition may provide subpar products or services, and if they have significant power, they might be less responsive to concerns regarding quality or performance.

How To Reduce?

In order to reduce the threats posed by the bargaining power of suppliers, businesses can adopt various strategies to manage supplier relationships effectively and strengthen their position in the marketplace. Here are some approaches to consider:

  • Diversify Supplier Base: Identify and engage with multiple suppliers for critical inputs. Having alternative sources helps reduce dependency on a single supplier and provides flexibility during negotiations.
  • Negotiate Favorable Contracts: Negotiate contracts with reasonable pricing, fair terms, and performance guarantees. Leverage market research and competitor data to strengthen the bargaining position.
  • Build Strong Supplier Relationships: Foster open communication and collaboration with suppliers. Cultivate a long-term, mutually beneficial partnership to encourage suppliers to work closely with the business.
  • Encourage Competition Among Suppliers: Create an environment that encourages competition among suppliers. Encourage bidding for contracts, leading to better terms and pricing for the business.

Frequently Asked Questions (FAQs)

1. What is the importance of the bargaining power of suppliers in the organic food industry?

The bargaining power of suppliers in the organic food industry can vary depending on the specific product or ingredient, its availability, the scale of production, and the overall market dynamics. Organic food companies must carefully manage supplier relationships, explore alternative sources, and adopt sustainable sourcing practices to reduce the impact of supplier bargaining power and ensure a stable supply of high-quality organic products.

2. What is the impact of the Internet on the bargaining power of the suppliers?

The Internet has transformed the way suppliers interact with their customers and has influenced their bargaining power in various ways. While the Internet has opened up new opportunities for suppliers, it has also intensified competition and provided buyers with more information and choices, ultimately impacting the balance of power in supplier-buyer relationships.

3. When the bargaining power of suppliers is low?

When numerous suppliers offer similar products or services, buyers have more options and negotiating power, reducing the influence of each supplier. In situations where the bargaining power of suppliers is low, buyers have more control in negotiations and can expect better pricing, more favorable terms, and greater flexibility in the relationship.

This article has been a guide to what is Bargaining Power of Suppliers. We explain its examples, how to determine and reduce it, and threats. You may also find some useful articles here –

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Comments

  1. Liana Nyashanu says

    This was helpful

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