In many industries, the balance of power has shifted dramatically from buyers to suppliers. A great example is the railway industry. Back in 1900, North America had 35 suppliers of cast rail wheels, so railway builders had plenty of choices. Fast forward a century, and that number has dropped to just two suppliers, and now there’s only one left. This means that railroad builders have no choice but to accept whatever price the supplier sets.
This shift has happened for a few reasons, which may all be at play in different industries. In some cases, suppliers have pushed out their competitors by cutting costs or introducing new technologies. In others, suppliers are free to set their own prices because the high demand for materials has outpaced supply. Sometimes, buyers have grouped together and driven prices down so much that many suppliers couldn’t survive, leaving only a few with significant power.
Whatever the reason, companies in a weak position with their suppliers need to handle the situation carefully. They can’t just rely on tough negotiations anymore. To help companies rethink their approach, we’ve created a four-step framework that gets riskier as you go along. First, they should assess whether they can help the supplier add value in other areas. If that’s not possible, they should explore changing their buying strategies. Next, they might consider acquiring an existing supplier or starting a new one. If none of these options work, they may have to consider a more aggressive approach, which can harm their relationship with the supplier and should really be a last resort.
Let’s now examine each stage in more detail.
Bring New Value to Your Supplier
This is the easiest way to change your relationship with a powerful supplier. By doing this, you can shift the balance of power and turn a simple business transaction into a valuable partnership. You can add new value in several ways. Here’s how:
Be a Gateway to New Markets
One of the fastest and least expensive ways to shift the power dynamic is to offer the supplier a market opportunity they can’t resist in exchange for better pricing. Finding the right incentive might take some effort. For example, a beverage company was facing yearly price hikes from its packaging supplier. It felt stuck because the supplier had patented its process, making their prices lower than anyone else’s.
But then the buyer found out that they were entering two large developing markets where the supplier had tried and failed to make an impact. The organization could assist the supplier in establishing a presence in these markets, the procurement manager recognized. Working with the marketing team, they crafted an irresistible offer: if the supplier agreed to a 10% price reduction globally, the company would use their cans in the new markets.
Reduce the Supplier’s Risks
If you can help a supplier lower its risks, you can ask for some concessions in return. For instance, a large chemical company was dealing with a stubborn supplier. To produce titanium dioxide, they needed feedstock made to very specific standards, and only this supplier could provide it. When the chemical company tried to increase its order, the supplier claimed they had limited capacity and demanded a higher price.
Understanding the cyclical nature of the industry, the chemical company realized the supplier would likely welcome a chance to lock in a long-term contract—something other customers couldn’t afford to offer. The procurement team teamed up with the finance department to create detailed models to find a price range that would give the supplier a 15% return on their investment. In the end, the supplier agreed to a multi-year contract with prices that wouldn’t change more than 10% each year, and the chemical company secured a 10% discount from the original quote.
Change How You Buy
If you can’t find any ways to help your supplier create new value, the next best option is to change how you make your purchases. This approach can affect other parts of your organization, so it’s essential to work closely with any teams that might be impacted. Here are three ways a company can change its purchasing habits, though each might require some detailed data collection and analysis.
Consolidate Purchase Orders
This is the safest and easiest option to implement. It might just mean looking closely at your internal procurement data.
For example, at one aircraft manufacturer, different departments were buying components from a large supplier independently. This led to the supplier raising prices significantly—sometimes doubling or tripling the original quotes. The supplier was making gross margins of about 20%, while the aircraft manufacturer was only making 10%. Plus, deliveries were often late, which increased the manufacturer’s overall costs. Individually, the departments couldn’t pressure the supplier for changes. But the unit CEOs got together, pooled their purchasing data, and confronted the supplier’s top executive, threatening to stop all orders unless things changed. The supplier responded by cutting prices to match the manufacturer’s margins and improving delivery times.
Even smaller companies can team up with others in their industry to form purchasing groups. In 2008, four banks in a European country faced an oligopoly of four ATM suppliers. To counter this, they formed a purchasing consortium for ATM parts and maintenance, ultimately reducing their costs by 25%. For these consortia to work, members need to have shared interests and solid governance. It’s also important that they don’t become too powerful to avoid antitrust issues, so this approach works best in competitive industries with many players.
Rethink Purchasing Bundles
If a company can’t create large purchasing bundles within specific product categories or regions, it should think about combining purchases across different categories. For instance, a telecom company negotiating with a powerful supplier for a specific component got price reductions by pointing out that they also bought other components from that supplier—ones they could easily get elsewhere. Similarly, a global chemical manufacturer used to sourcing a key ingredient from two suppliers, one in the U.S. and one in Europe, announced it was considering consolidating to a single supplier and began the process of choosing one. By offering a single global contract, it threatened to give the winning supplier access to the other’s territory. Facing this threat, both suppliers agreed to a 10% discount.
Sometimes, it’s better to break up your existing bundles. This can create competition among suppliers that didn’t exist before. For example, when a consumer goods company renegotiated its contract with a powerful data provider offering an integrated global package, the procurement team realized it needed to separate data (where the supplier had a monopoly in some regions) from analytical services (which were more competitive). They decided to negotiate on a country-by-country basis, allowing suppliers who could only cover certain areas to compete. As a result, they achieved savings of 10% on data and 20% on analytics.
Decrease Purchase Volume
The third way to change demand is to shift volume away from a powerful supplier, ideally by switching to a substitute or lower-cost product. Just the threat of this can make the supplier more open to negotiations, but the buyer’s organization needs to support this decision and be willing to reconsider what they buy. For example, one retailer we advised wanted to cut IT costs and found that most employees didn’t need to create documents—only to read them. They succeeded in getting rid of 75% of their office software licenses and switching to a less expensive read-only substitute.
Create a New Supplier
If you can’t find ways to change your company’s demand profile, the next step is to look for a completely new supply source. This strategy, like the previous ones, helps shift demand away from powerful suppliers, but it focuses on a different angle. This approach is often needed in industries where price negotiations have pushed most suppliers out of business, leaving only a few to dominate the market. However, this drastic move can completely alienate your current supplier and might change your business model. It could also impact the competitive landscape and even the structure of both your supplier’s industry and your own. So, while this is a risky option, if done right, it can really change your company’s future. Here are two main options to consider:
Bring in a Supplier from an Adjacent Market
One of the simplest ways to find a new supplier is to bring in a competitor from a nearby market or industry. This company might not have considered entering your market otherwise. For example, a major airline reduced its food costs and improved quality by enticing a European catering company to enter the U.S. airline catering market, which had been dominated by two long-standing suppliers that were hesitant to lower their prices. The new caterer had an innovative production model that allowed it to provide higher-quality food at significantly lower prices in exchange for long-term contracts.
Since the airline needed to offer a multiyear agreement to the new supplier, the procurement team made sure to involve the airline’s chief operating officer, head of airport operations, and head of catering in the planning process. After aligning everyone on the strategy, the airline announced that it had awarded the contract at a major U.S. hub to the new supplier. After losing this business, one of the established suppliers changed its management team and started taking a more collaborative approach with the airline.
Vertically Integrate
If you can’t find any new suppliers, consider becoming the new supplier yourself by investing in the necessary resources and capabilities. You might also think about forming a strategic partnership or joint venture with a company that already has some of those resources. Sometimes, just threatening to do this can shift the balance of power, as it did for a paper company that relied on a regulated utility for its electricity.
When the paper company couldn’t get a better rate from the utility, it started planning to build its own power plant—and made sure the utility was aware of these plans. They spent nine months finding a location, securing pipeline capacity, getting permits, and teaming up with a dryer company that wanted to use the steam from the plant. This strategy worked: the utility agreed to reduce its rates by 40% to keep the company from building its own plant. However, there’s a risk with this approach, as your threat to vertically integrate might be taken seriously. Before going down this path, make sure that the new venture can provide enough value to outweigh the investment costs and cover the added management responsibilities, as well as any hidden risks and challenges that might come up.
Also Read: How to Manage Inventory for Small Business?
Play Hardball
If all else fails, canceling your orders, cutting the supplier out of future business, or even threatening legal action might be your last resort—basically, your options before going out of business. These are serious steps to take.
For example, a global financial services firm found itself in a tough spot because it needed to save $3 billion. To cut costs on IT infrastructure, the firm asked its main hardware supplier for a 10% discount. When the supplier said no, the firm’s chief information officer went straight to the supplier’s CEO and announced that all their projects were put on hold—effective immediately. Within an hour, the supplier was deactivated in their payment system, and teams from procurement, IT, and development were told not to work with them anymore. Faced with losing valuable projects, the supplier quickly agreed to the price cut.
Then there’s the option of litigation. Back in the early 2000s, a security company that transported cash for banks decided to raise its rates by 40%. Since it controlled 70% of the market, most banks had no other choice. However, one bank, dealing with tight margins, pushed back. They wanted to understand why the increase was so high and asked to see the security company’s financial statements. The review revealed only a 10% increase in costs—nothing that justified such a steep price hike.
The bank took a two-pronged approach. Its chief operating officer met with the security company’s COO to explain that the increase was unacceptable and would hurt their relationship. At the same time, the procurement team warned that they might team up with other banks and report the issue to the national authorities that handle monopolies. In the end, the security company backed down and implemented a price increase that matched its actual cost increase.
As we’ve seen, companies dealing with powerful suppliers have several ways to change the game. Whatever option they pick, it’s essential to understand the problem clearly, work together across different teams, think creatively, and use strong analytical skills to get a big-picture view and useful insights. It’s also crucial for senior executives to focus on strategic moves instead of just tactical ones. With these elements in place, what initially seemed like an impossible negotiation can become just a challenging one.
