What is the source of suppliers bargaining power?

All organisations acquire goods, works and services necessary to satisfy their customer demands.

By NYASHA CHIZU

Firms in the primary sector procure more of equipment and services in relation to their demand for goods by their nature.

Whereas, organisations in the secondary sector procures more of goods in the form of equipment, raw materials and consumables as compared to the tertiary sector that procures more of services and consumables on a day to day basis.

The procurement processes for the goods, works and services create a buyer-supplier relationship between the market and the suppliers.

The relationship within the trading market varies and brings forth a certain dimension relating to the distribution of power in buyer-supplier relationships.

Where a supplier is considered to be powerful in terms of the Porters five forces, it implies that the supplier has influence to dictate the prices and availability of commodities.

Such power of a supplier may be amassed individually or it could be a collective efforts of suppliers in a similar market.

Such efforts in some countries could lead to such cartels being labelled as practicing an act of collusion that has profound consequences in most jurisdictions.

The characteristics of a market that are dominated with suppliers with a stronger bargaining power are characterised by a situation where such suppliers can raise their prices without feeling any knock on demand.

This is referred as demand elasticity in economics that reflects to how sensitive the demand for a good is to changes in other economic variables, such as the prices and product availability.

It is arrived at by calculating the percent change in quantity of a good demanded over the percent change in another economic variable.

A lower demand elasticity for a particular economic variable means that suppliers are more powerful in the market to an extent that their negative actions do not have an effect on demand.

In such circumstances, the suppliers can adjust other variables such the control of quantity of products available to the market.

The global oil industry is one such a market and the control of the quantity available to the market is actually done by way of formal cooperation between the Organisation of Petroleum Exporting Countries’ members.

In other markets, suppliers collaborate informally and as such, it is necessary to access from time to time the balance of power in the market.

Suppliers’ power is also stronger in markets where there are limited substitutes.

This creates a dependence situation on the part of the buyers which suppliers are capable of exploiting.

In some cases, substitutes maybe be available but the buying firm will have put themselves in a situation that ties themselves to one supplier.

Most buyers deliberately or through lack of knowledge develop specifications of plants around one particular technology thereby knowingly or unknowingly, pitting the product of one supplier as critical.

This can also happen in production where one chooses to place a supplier’s product critical to the end product.

This inevitably increases switching costs at the advantage of creating or promoting bargaining power of your supplier.

Most jurisdictions developed extensive anti-trust laws to deal with both formal and informal cartels for collusion on both pricing and quantity.

Such laws come with heavy penalties and many cases in sectors such as software, finance, healthcare, utility and oil companies have been prosecuted.

For such laws to effectively protect the citizens, the buyers need to understand the factors that contribute to suppliers bargaining power in order to analyse if the situation is not illegal in terms of the laws of their countries.

Nyasha Chizu is a Fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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