Becoming dependent on a supplier for a key component of your operations has key limitations – they may look to take advantage of the situation and increase prices, knowing that you have little other options to turn to other than them. This article explores some approaches for reducing the power of your suppliers, by keeping your options open.
One of the most well-known approaches to reducing the power of your suppliers is dual sourcing. If you have two active relationships with different suppliers for the same parts, you can avoid getting locked into either of them. Should one look to increase the price, you can reduce the amount that you purchase from them. Indeed, simply demonstrating the ability to easily move between your two suppliers may be sufficient to avoid either of them looking to increase prices – they are aware of your flexibility, and their reduced power in the situation.
Retaining the ability to undertake the activity yourself
Another key part of maintaining options and reducing the power suppliers can have over you is to retain the ability to manufacture some of the components that you are getting from them yourself. If you are actively making a proportion of parts that you get from them and can demonstrate this, then it reduces your dependence on them. Indeed, as with dual sourcing, simply illustrating your own independent ability to undertake the activity internally may be sufficient to prevent your suppliers from looking to increase costs – they can see that doing so would likely cause you to move more manufacturing in-house.
Keeping yourself aware of alternatives - and having plans in place to allow you to change
Finally, another way of reducing the power that a supplier may have over you is to actively keep your options open. While dual sourcing involves maintaining relationships with two suppliers for each part, there may be a way of keeping open this possibility, without the actual difficulties of sourcing the same part from two places. For example, you could outsource some components to one firm, others to a second, and some final ones to a third. While each one may momentarily be able to exert some power, if they were to do so, you at least have easy options in place to move to one of the other firms. If on the other hand all of your components were made by one company, the ability to do this would be much less.
Final thoughts: Carefully consider your inputs, and determine which ones you may be at risk of your supplier looking to exert power
Not all of your inputs will have the same level of opportunities for suppliers to look to push up the prices. For commodity products, or items where there are hundreds of firms that you can plausibly turn to, the ability of the supplier to exert power is inherently low. Where the issues start to increase though is where it takes much longer to switch – where for example a supplier is making custom pieces for you, and they are an integral part of your operations. In such cases, it may be worth making sure that you have not become dependent on them, leaving open the possibility that they will look to increase their prices and capture a greater proportion of the overall value that is being created.
Why do some firms look to buy from multiple suppliers? This article explores the reasons for dual sourcing, where companies seek multiple suppliers for key inputs.
This article explores which components and materials it is particularly important to consider dual sourcing for.
Switching costs essentially lock customers into a particular supplier, increasing the difficulty to change suppliers. This article explores the impact of switching costs and the various barriers to changing suppliers.
This article explores some of the most common forms of switching costs – from termination fees to effort to relearn a new system.
This article explores some key risks of outsourcing manufacturing – and why you may want to keep some manufacturing in-house.
This article explores the impact that high switching costs can have on industry entry barriers – why high switching costs can make it difficult for new firms to enter the market.
Where do cost-saving synergies come from? This article explores opportunities for savings from related diversification.
This guide explains contingency planning – or what-if analysis – illustrating the importance of planning for contingencies at your startup.
What-if analysis (contingency planning) is an important analysis to perform to ascertain the extent to which your supply chain is susceptible to various disruptions, and how you would handle disruptions should they arise.