In the previous post titled ‘Bargaining Power of Suppliers – What Does It Mean for Your Business,’ we saw what bargaining power of suppliers meant and what causes it. In this post, we’ll look at some ways in which organizations can safeguard against and reduce this power.
Backward integration: This is one of the techniques widely employed today to reduce the bargaining power of suppliers. Backward integration is the process through which an organization acquires its suppliers to reduce the volatilities in the supply chain or create a monopoly in its industry. With the organization controlling its own suppliers, the scope for supply chain disruptions is greatly reduced as well as the bargaining power of suppliers. A simple example is a food business owning its farms. This can also increase the efficiency of the chain and result in cost savings.
Multiple suppliers: When a business has only one supplier, that supplier tends to enjoy a lot of power. By diversifying and spreading its purchases around, organizations can reduce suppliers’ power. It clearly tells your supplier that if there are any disruptions or volatilities, you have other choices.
Increase profile: This is on the other side of the coin when compared to the previous point. If your industry doesn’t have multiple suppliers, try to become the dominant player in the market and increase your business profile. Bulk procurement also helps in this regard. No supplier would want to antagonize his biggest buyers.
Substitutes: Substitutes are those which essentially perform the same function and satisfy the same need as the product. If your business has the availability of substitutes, you can use them in place of regular raw materials.
Market education: Sometimes, when suppliers enjoy a bargaining power, it is not always because the supplier did something right. It could also be that the buyer did something wrong. Procurement professionals have to make themselves familiar with the market or its changes and recent trends in order to avoid being taken for a ride by their suppliers.
Know more ways to reduce bargaining power of suppliers? Leave a comment.