Analyzing Your Industry: Supplier Power

Supplier power in the airline industryI often find that entrepreneurs neglect to analyze their suppliers when they are starting a business or writing a business plan. Your suppliers may be more important to your business than you think, and that’s why it’s a good idea to analyse supplier power in your industry. Suppliers provide the raw materials you need to run your business – from ingredients to office supplies – and the more you need them, the more power they have.

In some industries, supplier power is low because the business can get its raw materials from other sources. For example, if you’re in the food industry, there are a number of places you can get your ingredients or packaging, unless you have a specialized product that requires very specific raw materials. If you build decks, there are a lot of places you can get your lumber. In these cases, supplier power is low, because your switching costs are also low. If you don’t like one supplier, you can just go find a new one. However, sometimes you’re locked into contracts or you have really good credit terms with one supplier, and this can raise switching costs even when the supplies you need are easy to get.

When supplier power is high, your business becomes extremely dependent on another company for its raw materials, and losing that supplier can be detrimental to your company’s continued success. Airlines are one of the best examples of this, but many capital-intensive industries have high supplier power. An airline has few choices when it comes to aircraft suppliers, since Boeing, AirBus, and Bombardier make most of the world’s aircraft. Switching suppliers could mean retraining maintenance crews, changing destination airports, or even shifting airline capacity.

Sometimes supplier power varies for different companies in an industry. For example, Wal-Mart’s suppliers have almost no power, because Wal-Mart’s business represents such massive volumes that suppliers have little choice but to do whatever Wal-Mart asks of them. However, if that supplier also provides inventory for a small retail shop, it has much more power over that shop; the account is really small in comparison to Wal-Mart, so the supplier can dictate its terms to the small retailer with little concern over losing the account.

When considering suppliers for your business, do a thorough analysis of the credit terms, and make sure the supplier’s values are aligned with your own. Assess the risk that you’ll have to change suppliers, and consider what that would mean for your business financially.