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iv)                Suppliers

 

The point you will be trying to examine when analyzing your suppliers is whether they are holding a substantial bargaining power against you and how it translates into lower or higher flexibility for your business.

 

Indeed, the consequences of very powerful suppliers can be multifold:

 

-          smaller discount on wholesale purchases.

-          smaller authorized payables, which will hurt your working capital (payables represent the amount of money that you still owe to your suppliers; we will meet this notion in greater details in section 4).

-          etc …

 

On the contrary, suppliers who enjoy a smaller bargaining power will stand at a disadvantage:

 

-          they will have to offer deep discounts in order to keep your business

-          they will need to grant you very generous payment terms and thus will hurt their working capital while improving yours (we will develop this notion later when we introduce financial analysis in section 5).

 

Example 1 : Operating systems and the PC manufacturing industry

 

One of the most relevant examples of a strong supplier is that of Microsoft with respect to the PC manufacturing industry; indeed, since Windows is enjoying a quasi-monopolistic position among  operating systems, the PC manufacturers will have no choice but to purchase Windows licenses and install them on their hardware (otherwise their customers will steer away, since most of them are looking for computers equipped by Microsoft). This leads to a situation of abusive power which can often appear as illegal and triggers antitrust laws in certain countries (for instance, Microsoft was fined for using its Windows monopoly in order to force the use of their Web browser Internet Explorer onto their Windows users, which was achieved simply by embedding that browser within every Windows version).

 

Example 2 : Selling diamonds

 

Another striking example of strong suppliers is that provided by the suppliers of the diamonds industry. Indeed, this sector is dominated by the giant Debeers which roughly controls 60% of the global market share and which in 2004 was condemned for price-fixing, i.e. for abusing its dominant position by agreeing to sell its gems at a price which was predetermined in concert with its main competitors. Such a conduct is considered illegal because it can be seen as preventing natural price competition, thereby severely penalizing customers. 

 

Example 3: The retail industry

 

Let’s now move on to the other end of the spectrum. Large retailers can choose among a huge variety of competing products to put on their shelves, and thus can dictate their own rules: for instance, the retail industry will be able to obtain generous payment terms from its suppliers. Indeed, it will be able to pay them several months after delivery, while enjoying immediate payment from their customers and keeping a moderate level of stocks (therefore, they will maintain a structurally negative working capital, as we will see later).

 

Example 4:  Food manufacturers

 

Similarly farmers, which are the suppliers of food manufacturers, stand in very large numbers and provide the food industry with undifferentiated products (fruits, vegetables and cereals). Thus, they have close to no bargaining power and are unable to individually influence prices.

 

By now you probably have realized that the role of suppliers will be pivotal to the success of your business; therefore, it is wise for you to make a conscious decision regarding the measures that you will be able to take in order to prevent them from wielding too much power against you: for instance, you could consider vertical integration (that is, absorbing your suppliers).