You should never underestimate the power a supplier can have over your business. Yes, you heard right! It is not only the buyer that has power in the market but also the supplier in some instances. This was a key focus of my risk management and competitor analysis.
Having only one supplier to your business for either the full product or service or components that make up your product is too risky and not viable.
As we all learnt through Covid, even essential supplies can be disrupted.
Imagine that you build up a whole business, invest so much time and money, and you only have one supplier.
Now imagine that one supplier goes out of business and closes their doors.
Imagine your supplier initially presents as a wholesaler, suddenly becomes your competitor, undercuts you in every way possible, or stops supplying you. They cut out the middleman (who is you) and deal only in retail, directly to the consumer.
These are the things you would need to consider when dealing with suppliers. Very real situations that could have incredible impacts on your business. I will give you an example of supplier power below.
One of the reasons I began manufacturing my product was to regain control over my business. I had a couple of tough years with one supplier limiting their supply to us because they saw the potential of retail and copied our business model and therefore put their resources into supplying themselves over us. I had to cease my sales until I could source another supplier that could provide the quantities and quality I needed.
The new supplier could only produce a small amount so they couldn’t fulfil my quantities either.
The third supplier as we found out was verging on bankruptcy. They were using unethical strategies to keep operating. They also went on to copy our business model and become competitors. Yup! I was suddenly learning strategies to protect my business from copycats.
Thankfully, there was no fourth supplier as I became a manufacturer and created my own production line. In doing so, however, I now had to seek supply of raw materials to manufacture that product; so, with manufacturing came more suppliers, but I knew exactly what to look out for and how to deal with them.
Try to get to know your suppliers in depth. Things to look for is what their business model is like, who they supply, how long they have been in business and what their reputation is like in their industry.
How can suppliers have power over buyers?
If they provide a product or service that is limited to them or a few suppliers, this creates less competition and gives them greater bargaining power. They can then start to control the quantities they sell you; they will increase prices and sometimes decrease their quality. They are paying less to provide you with a product or service by reducing their quality but still maintaining or increasing their prices.
How do they get to have so much bargaining power to start with?
The first reason is a supply and demand issue. That is, where there is a high demand for what they are providing but little supply of it. It could also be that they are the only ones supplying it, which makes their position even more powerful. This is then known as a “monopoly”.
The second reason is companies rely too much on one supplier. They would generally do this if the conditions were highly favourable compared to other suppliers (such as a generous credit limit and high discounts by showing loyalty).
In my opinion and experience, this is somewhat of a short-term thinking process for business owners. You are looking to better your situation and maximise your profits, but you are putting yourself in a very vulnerable position in the long term. Put simply, by sticking to only one supplier, you are contributing to the exit of other suppliers in the industry and handing a monopoly over to the one giving you the better terms. Be mindful of these sorts of situations.
I was presented with this situation in my time, whereby my raw material supplier offered me a 10-15% discount on one of my primary materials in return for exclusivity. I knew that if I accepted, I would be giving them the power to eliminate their competition. It wasn’t difficult to figure out that the same saving would no longer be there 2 to 3 years down the track, and the price would skyrocket. The ability to have the foresight and be proactive is a great advantage.
The third reason is that it would be inconvenient due to the costs involved or lengthy setups, to change a supplier.
I speak of personal experience here once again. I remember paying thousands of dollars to set up a full integration with UPS courier at the backend of my online store. More time and effort in training staff how to use it. It was, however, a seamless experience and one worth investing in.
DHL knocked on my door a couple of years later with competitive rates. It was too much time, effort, and money for me to make that switch then. I then also weighed up the concept of “not fixing something that wasn’t broken”. I decided to stay with UPS.
While I was essentially giving greater bargaining power to UPS, I mitigated that by not disclosing this information to them. As far as they were concerned, I could leave at any time if approached by another company with better rates or better service. This kept them on their toes and the rates low.
Take Away Note
Ensure you have 2 or 3 suppliers for each element needed in your business. This includes your raw materials, right down to your packaging material. For every single aspect that you need to complete a sale in its entirety, you must have 2 to 3 suppliers. Remember, supply chain disruptions can disrupt your work flow and cause significant consequences to any business.
Ensure you always keep a good relationship with your suppliers. They are critical to the success of your business.
