Phase 2: Market Analysis
Next the company weights the bargaining power of its suppliers against its own strength as a customer
(see Exhibit III). It systematically reviews the supply
market, assessing the availability of strategic materials
in terms of both quality and quantity, and the
relative strength of existing vendors. The company
then analyzes its own needs and supply lines to gauge
its ability to get the kind of supply terms it wants.
Of the contrasting criteria of supplier and company
strength listed in Exhibit III, some are self-explanatory.
But six call for special comment.
Suppliers’ capacity utilization. This criterion indi-cates the risk of supply bottlenecks. In a cyclical
upswing, with suppliers’ production running at 90%
of capacity, the probability of a bottleneck in the supply
of a strategic item is extremely high. Electronics
manufacturers that have neither their own chip-production
facilities nor adequate contractual coverage
have nightmares whenever demand for microchips
heats up. A European aircraft manufacturer had specified
high-grade titanium alloys for certain applications
but had failed to reckon with potential supply bottlenecks.
After a series of production setbacks and cost
increases, it has now switched back to specialty steels.
Supplier’s break-even stability. A supplier that
achieves break-even at below 70% capacity utilization
can ultimately deliver at lower cost than one
who breaks even at 80% utilization. For the same
reason, however, the first supplier will prove a tougher
bargainer, for it can more easily delay negotiations
and accept capacity underutilization.
Uniqueness of suppliers’ product. This is a function
of natural scarcity (as in certain strategic metals
and minerals), high technological sophistication
(like the 256K RAM chip), and/or entry barriers in
the form of high R&D or facility investments. If a
product is unique, the probability is less that alternative
sources or suppliers will appear or that supplier
competition will force cost reductions.
Annual volume purchased and expected growth
in demand. Volume, the main determinant of the
company’s overall bargaining power, is critical because
economies of scale in purchasing often yield a decisive
competitive cost advantage. In the case of many
automotive parts, cost reductions as large as 4% can
often be achieved by doubling the volume allocated
to a given supplier.
Past variations in capacity utilization of main production
units. A company can judge the built-in flexibility
of its supply coverage from past variations in
demand resulting from sales strategies and promotions,
changes in the order backlog, or overall economic conditions.
If the company plans a major expansion or an
aggressive sales strategy for a product line where supplies
are tight or suppliers’ capacities fully used, it may
be able to cover the higher materials requirements only
by paying a price premium. In turn, projected profits
may decline.
Potential costs in the event of non-delivery or inadequate
quality. The higher such costs and the greater
the risk of incurring them, the less latitude the company
has for rapidly shifting supply sources or delaying
negotiations or contracts. These costs influence
required inventory levels and safety stocks, but they
mainly affect production. Changing a source of supply
might, for example, make it necessary to modify
the production process. In the case of materials
for highly automated production processes (such as
certain alloy steels or carbide tools), the costs of such
modification could be prohibitive.
No list of evaluation criteria is equally applicable
to every industry: a petrochemicals producer and an
automobile manufacturer would each have its own
modifications to those shown in the exhibit. Moreover,
the relative importance of different criteria may vary
with technological change or with shifts in the industry’s
competitive dynamics. Careful definition of the
criteria of both supplier and company strength is a
prerequisite to accurate market analysis.