Bargaining Power of Suppliers
How Much Power Do Your
Suppliers Have Over You?
Any business requires inputs—labor, parts, raw materials,
and services. The cost of your inputs can have a significant
effect on your company’s profitability. Whether the strength of
suppliers represents a weak or a strong force hinges on the
amount of bargaining power they can exert and, ultimately,
on how they can influence the terms and conditions of
transactions in their favor. Suppliers would prefer to sell to
you at the highest price possible or provide you with no more
services than necessary. If the force is weak, then you may be
able to negotiate a favorable business deal for yourself.
Conversely, if the force is strong, then you are in a weak
position and may have to pay a higher price or accept a lower
level of quality or service.
Factors Affecting the
Bargaining Power of Suppliers
Suppliers have the most power when:
• The input(s) you require are available only from a
small number of suppliers. For instance, if you are
making computers and need microprocessors, you will
have little or no bargaining power with Intel, the
world’s dominant supplier.
• The inputs you require are unique, making it costly to
switch suppliers. If you use a certain enzyme in a food
manufacturing process, changing to another supplier
may require you to change your entire manufacturing
process. This may be very costly to you, thus you will
have less bargaining power with your supplier.
• Your input purchases don’t represent a significant
portion of the supplier’s business. If the supplier does
not depend on your business, you will have less power
to negotiate. Of course the oppo ...