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If you are a manufacturer, you will need to purchase many components and materials to create your products. These suppliers are the companies you buy these products from. They provide you with the necessary materials to produce your products. But if there is a shortage of suppliers or violation of contracts, your supplier will have the upper hand. This is also known as supplier power. In this article, we will be digging deep into supplier power and how you can minimize it.
Supplier power definition
Supplier power is the capacity of manufacturers to influence prices in their favor. Suppliers have supply-side economies of scale, which can give them certain advantages when dealing with large volumes in purchasing.
Large companies are in a better position where they can negotiate with suppliers to get lower prices on materials and supplies because if they stop buying from a certain supplier, the company has other suppliers that can take its place.
Smaller companies are in a different position because they don’t have this option and therefore, must pay more for supplies. In their case, supplier power is much higher because there aren’t many options.
What is the Bargaining power
Bargaining power is the capacity of companies to influence prices in their favor. Bargaining power is affected by many different factors such as the number of players in an industry and the resources of these companies.
Bargaining power is influenced by economies of scale, which is why large companies have an advantage when dealing with small suppliers. Smaller companies lack this bargaining power because they can not afford to buy in bulk.
How supplier power is created
There are many different ways supplier power is influenced, here are some of them
- Number of suppliers in the area
Supplier power is directly linked to the number of suppliers in the market. A small number of suppliers means there are only a few choices when purchasing materials for production. This gives these suppliers more bargaining power because they can choose what companies to deal with.
- The size of the buying company
The larger the buying company is, the more bargaining power they have. If a supplier has too many clients and one of them stops making purchases or decides to leave, it can be replaced by another client.
- Demand for the material
The more in-demand material is, the more power suppliers have. If there are ten manufacturers wanting to buy the same material and there is only one supplier, they can dictate prices without much fear of losing business because these companies need that specific product and will pay almost any price for it.
- Control over distribution
Suppliers with control over distribution have more power because they can decide which manufacturers, or companies, will get the materials. This is why distributors are included in supplier power. If distributors don’t want to sell your company products, there’s not much you can do about it.
How to minimize supplier power
Here are some of the ways you can minimize supplier power in your business.
- Give value to your supplier
If you value your suppliers, they will want to continue supplying you so that their work is appreciated. Suppliers are in business just like any other company and the same rules apply. They will not want to lose clients so providing them with continued business can do wonders for your relationship.
- Create long-term relationships with suppliers
Another way to minimize supplier power is by creating long-term relationships with suppliers. If you create a relationship based on trust between yourself and your supplier, you will have more bargaining power when negotiating prices.
- Be loyal to suppliers
If you are loyal to suppliers, they will be able to count on you for future business which means they won’t want to lose you as a client and will give you better prices. This can be achieved by only working with one supplier for the same material or product, no matter how times prices increase.
- Don’t rely on one supplier
Make sure you have multiple suppliers for the same material if possible. This way, if one of them stops supplying for whatever reason, you will still be able to get your hands on what you need because other suppliers can take their place.
There you have it. Supplier power is an important part of business and it can have a huge impact on your financial situation. Make sure to take these tips into account when dealing with suppliers so that you will always have the bargaining power in your favor.
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