Bargaining power of suppliers

Author: John Park, Texas A&M University,

Your business depends on certain suppliers that provide labor, materials and other components. Competitive pressure from these suppliers is strong when they can exercise sufficient bargaining power to influence the terms and conditions of exchange in their favor. This pressure is further strengthened when suppliers are concentrated. In agriculture, producers typically are seen as having little bargaining power or leverage due to the number of sellers in the open market. Likewise, cooperatives face this dilemma on a daily basis. It is relatively easy for farmers to obtain what they need from several different suppliers as well as market their products through several different channels of distribution.

Your suppliers have a weak bargaining power when close substitutes for their goods or services are available, and it is neither costly nor difficult to change suppliers. Suppliers also have less power over your pricing and terms of sale when your firm is a significant customer and the loss of your business would have serious negative effects. Similarly, customers may be at the mercy of a supplier if the supplier controls the market, enabling the supplier to exert pricing power.

Collaboration with your suppliers can translate into a competitive advantage in the market. In many industries, sellers are signing long-term strategic agreements with select suppliers to: improve inventory efficiency and reduce costs, “lock-in” specific quality standards, improve delivery and reliability of products and tap the potential for higher profits in the marketplace.

Your Turn …

  • List your major suppliers and consider their importance to your business.
  • Are you a significant customer of these suppliers?
  • Are there ways you can lessen their strength through finding alternative suppliers or strengthening collaborative efforts?