Supplier Power: When Inputs Set the Terms

Supplier power is what an input seller can make a buyer agree to, and it sits in the alternatives column rather than in the size of the bill. Anjani Stationers Private Limited, an invented stationery works, sends 46.0 per cent of its outside payments to a paper mill it could replace in 2 weeks from nine alternatives making the same weight and finish. The mill holds no terms at all.

The six outside parties Anjani Stationers pays are set out under The Value Network: Who a Business Depends On, with what each one takes and how many weeks a replacement would need. The value network asks which of the six is the larger dependency, finds that the biggest bill and the longest wait sit on two different rows, and settles it. Supplier power picks the same six up and asks a question the value network leaves alone: not who could stop the work, but who could decide what the work costs.

The table those six sit in carries three columns and not two. The share each party takes of what the business pays outside. How many weeks a replacement would need. And how many other parties are known to do the same job. Both of the first two sort a list into an order somebody wants, so both get read constantly. This force turns on the third column, and the third column is dropped the moment a table is summarised. A count of alternatives sorts nothing. Reading that column is most of the work.

The same paper market does two different jobs. Here the nine mills are evidence about one supplier's position, and the argument is that a split-up supply side is why this force is weak in this particular business. Consolidation and Fragmentation: How an Industry Concentrates uses the same counts and the same replacement times to show what a split-up population of sellers looks like from outside, a picture rather than a cause. One relationship, two jobs, and this one is the cause.

Who could stop a business, and who could price it?

Start at a front door rather than in a works. A household buys milk every morning and pays rent twice a year. The milkman is there daily, the milk bill adds up over twelve months, and he sits inside the household routine in a way the landlord never does. Now ask which of the two decides what the household pays. The landlord decides, and it is not close. If the milkman raises his rate, somebody walks two streets and has another one by Thursday. If the landlord raises the rent, the household pays it or moves house.

Nothing in that comparison turned on size. The answer turns on whether there is anywhere else to go. In a small flat the milk bill might be a real fraction of the rent, and it would change nothing. Two questions are hiding inside what sounds like one. Who could stop a business is a question about time, and it is answered by how many weeks a replacement would need. Who could price a business is a question about choice, and it is answered by how many other parties would do the same job. A party with no alternative holds the buyer's terms, and a party with nine alternatives holds nothing, however large its invoice is.

Supplier power is that second question asked about the parties a business buys from. Competitive Strategy, 1980, by Michael Porter, places it among five forces pressing on a field, and supplier power is one of the five taken on its own. The word power is doing precise work. Power does not mean important, does not mean large, and does not mean painful to lose. Power means able to decide, and the thing being decided is what the buyer agrees to.

Here are Anjani Stationers' six, quoted exactly as they were published. Its lead product is a hard bound register, and the six shares come to 100.0 by construction.

A counterpartyAnybody on the other side of an arrangement a business has entered into. The word carries nothing about size, closeness or importance, only that there are two parties and this is the other one. table like that one is normally printed in the order above, which is an order of size, because that is the order a payments ledger falls out in. Sort the same six by who could stop the work and the order changes almost completely. Sort them again by who could set the terms and it barely moves from the second sort, and that near agreement is worth a sentence rather than a shrug: a party that can be replaced quickly is usually a party with somewhere to replace it from. Neither of those two sorts resembles the order the table is actually printed in.

What does an input seller's power actually turn on?

Five things, and they are worth counting out loud. Only one of the five is easy to look up, and that is the reason this force gets read badly.

One, how many other parties would do the same job. This is the whole hinge, and everything else is a modifier on it. Two, how alike what they sell is. Ten sellers of ten different things are not ten alternatives; ten sellers of the identical thing are. Three, what it would cost the buyer to move. A move is a real cost and a real barrier, and it is measured separately under Switching Costs: Why Customers Stay Even When They Could Leave. Four, whether the buyer could make the thing itself. The option turns a purchase into a choice rather than a necessity, and it is weighed under Make vs Buy: Whether a Step Is Worth Owning at All. Five, how much the input matters inside the buyer's own costs. The weight decides not who holds power but what holding it would be worth.

Four of those five are facts about somebody else's business, and not one of the four is in the buyer's accounts. The ledger knows what was paid, when it was paid and to whom. The ledger does not know how many other works make the same grade of board, how close their specification is to the one being bought, what a change of supplier would really cost in retooling, or whether the works could make it in house. Every one of those is something a person has to walk out and ask a stranger about. Only the fifth, how heavy this input is inside the buyer's own costs, falls out of figures already held.

For Anjani Stationers the first, the second and the fifth are published, and the third and the fourth are not. Nine parties are known to do the job. The nine make the same weight and finish, and that settles how alike the goods are. Paper is 58.33 per cent of what the business takes in, and that settles how much it matters. The switching costEverything a buyer has to spend or redo in order to move from one supplier to another: retooling, retesting, re-approving a specification, and the work of setting up a new arrangement. Switching cost is a separate measurement, sized under Switching Costs: Why Customers Stay Even When They Could Leave. of a change of mill is not published, and whether the works could make its own paper is not published either. Saying which three of the five are in hand is not a caveat. Knowing which three are in hand is the reading.

Where does the largest line in the business get bought?

Take the top row of that table on its own. The paper millA works whose entire trade is turning pulp into finished sheet and selling it on by the ream. Anjani Stationers makes nothing in one and sits on the buying end of a mill. takes 46.0 per cent of everything Anjani Stationers pays outside, which is more than the next two rows put together, since 17.0 and 14.0 come to 31.0. Look at the same purchase from the other end and paper is 58.33 per cent of what the business takes in. Both of those are true at once and they are measuring different things: one is a share of what goes out to six named parties, the other is a share of revenue. By either ruler, this is the largest buying decision in the business by a distance.

Now read the column that settles the question. Nine other mills within reach make the same weight and finish. Quotes come back in a day. A first delivery lands in about two weeks. Two weeks is the lead timeHow many days or weeks pass between saying yes to an order and the goods standing on the buyer's own floor. Lead time is dead time nobody can compress, so it decides how far ahead a choice has to be made. a change of supplier has to be planned around. Put those three facts beside the 46.0 per cent and ask what the mill can actually decide. The mill can decide what it quotes. A quote the works does not like is a telephone call away from being replaced by one of nine others selling a thing the works cannot tell apart, so the mill cannot decide what Anjani Stationers pays. Nine is the figure that answers the question asked here, and 46.0 is not.

Keep the direction of this straight. The slip is an easy one to make. Everything commodity-shaped in this business sits on what Anjani Stationers buys. The register it sells goes into school relationships that have run for years, the opposite of an interchangeable good. The kind of field a market in identical goods makes, and every rate that goes with that reading, is taken up under Industry Types: How Sectors Behave Differently. Supplier power asks one thing about paper, and it is who was doing the choosing.

Which party could actually hold Anjani Stationers?

Go to the bottom of the table, to the row nobody reads. The machine servicing contractor takes 4.0 per cent of what the business pays outside. The contractor has exactly 1 known alternative. A replacement would take 26 weeks, half a year of a folding and gluing machine standing still.

Put the two ratios side by side and say both out loud. Each one is true and they point in opposite directions. 26 weeks against the mill's 2 is a ratio of 13. And 46.0 over 4.0 is 11.5, so the mill is 11.5 times the servicing contractor's size. The smallest invoice on the list is the only place on it where the buyer has somewhere else to go exactly once. Everywhere else there are three, five, six, nine or twelve places to go. Here there is one, and one is a great deal closer to none than to nine.

Now the honest half, and it is not optional. No rate is published for the servicing contractor anywhere. The position can be shown to exist, and what it has ever been worth cannot. A plausible estimate would be a number from memory wearing the clothes of a conclusion, and every later sentence would inherit it, so the limit deserves saying plainly rather than papering over. Think of the one electrician in a small town certified on a particular lift. Everybody in the building knows the position. Nobody publishes what it costs.

Why does no rupee figure attach to any counterparty except paper?

The obvious next step with a calculator is a wrong one, and it is better stopped before than corrected after. The paper bill is published in rupees: Rs 1,57,50,000/- for 75,000 reamsThe unit paper is bought and counted in. One ream is a fixed number of sheets, so a ream is a physical quantity. A rupee amount divided by a count of reams therefore gives a rate rather than an opinion. at a weighted average rateThe rate arrived at by dividing everything paid by everything received, so a large batch pulls the answer towards its own rate and a small one barely moves it. The weighted average is an outcome of a year of buying rather than a rate anybody quoted. of exactly Rs 210.00 a ream. The six spend shares are published as proportions of what Anjani Stationers pays out to those six parties, and as nothing else.

So the obvious move is to take 46.0 per cent, divide the paper bill by it, reach a total for outside payments, and read every other row off in rupees. The two lists are different objects. Dividing one by the other would manufacture a total nobody published. Nothing anywhere states that the six parties are all of what Anjani Stationers pays out, and nothing states that the paper bill and the spend shares were drawn from the same boundary. A figure built on both assumptions would look derived and therefore trustworthy, and the look is exactly what makes it dangerous. Every number computed afterwards would quietly inherit it.

The consequence is more useful than it sounds, and it is not a technicality. Which party holds terms can be said, and for five of the six the worth of those terms in rupees cannot. A spend analysis comes out of a ledger in an afternoon. An alternatives count only exists once somebody has walked out and collected it. Expect exactly that shape of gap in a real business too. The easy column and the deciding column are almost never the same column, and the one that is easy is the one that gets published.

Why is a split-up supply side the reason this force is weak?

The three published facts about the paper market add up to something when they are put together, and the addition is causal. Nine other parties make the same weight and finish. A quote comes back in a day. A first delivery lands in about two weeks. On every single order Anjani Stationers is the party holding a choice, and each of the ten sellers is the party hoping to be chosen. Economics settles the mechanism in one clause: near-identical goods leave no seller able to move the price.

The count of equivalent sellers is what makes the buyer the one setting the terms, not anything Anjani Stationers is or does. Hold onto the direction of that causation. The count comes first and the buyer's position follows from it. Nothing about being a stationery works, or being well run, or being a good customer, produced this. Put the same works in front of one mill and the reading inverts overnight without a single thing changing inside the works.

All of this leaves a mark in a set of accounts, and the mark can be checked. The 75,000 reams did not arrive on one day at one rate. The reams came in three separate lots spread through the year, each struck at its own rate. Buying looks like that in a works whose order book fills and empties with the calendar. The year's cost is therefore an average weighted by how many reams each lot carried, and that average is exactly Rs 210.00 a ream, multiplying back to the published Rs 1,57,50,000/-. A rate assembled from three separate lots is a rate nobody set, and that is what an account looks like when no seller holds the terms.

Notice also what a rate assembled that way is not. A rate assembled from three lots is not a list rateA rate a seller puts out openly, before any particular order has been discussed. A list rate is an opening position rather than a settled figure, and how near it anybody ends up paying depends on what else they could do. that somebody printed and everybody paid. Three lots at three rates means three separate moments where the works could have gone elsewhere and chose not to, and the year's figure is the residue of those three choices.

The other half of the contrast carries no published figure at all. Where a seller does hold the terms, an account does not look like that. There is one party, one arrangement and one figure that simply renews, and the buyer's own year has nothing in it that could be called assembling. No number exists for any of these six. The shape of the account is the whole of what can be said, and it is enough to recognise later. Anything about the best rate struck in the year, and what the whole year priced at it would come to, belongs with Industry Types: How Sectors Behave Differently. For this force the rupee arithmetic ends at Rs 210.00.

What do the two published years settle about the input side?

Anjani Stationers has two years of published figures, and there is exactly one test the input side can be put to with them. Its contribution margin, meaning the share of every rupee of sales that survives the costs moving with the sale, stood at 42.75 per cent across year one and at 42.78 per cent across year two.

Follow what an input seller taking something would have had to do. The gap between what a register is sold for and what the materials in it cost is precisely what a sale leaves behind, so the seller would have had to take it out of there. Across twenty four months that gap moved 0.03 of a point, and it moved up. The pair acquits the input side over twenty four months and convicts nobody, and the acquittal covers that window and not a day more.

The sentence is easy to over-read in both directions. Two years is not long. The nine mills existing is a fact about the published year, stated for no other year, and nothing says the count has held, or would hold, or means anything about a third year nobody has seen. And a margin that did not move cannot convict anybody either. A flat margin rules an input seller out as the cause of a movement that did not happen, a genuine finding and a narrow one.

Can the same test be run on Setu Bazaar?

No, and saying so plainly is worth more than a guess dressed up as an answer. Setu Bazaar, an invented marketplace, moves Rs 5,00,00,00,000/- of goods across itself in a year and holds none of them. Its six outside parties are published too, with what each takes and how many weeks a replacement would need.

Two columns are filled and the third is empty all the way down. The test needs a column that is not published for Setu Bazaar, so the test does not run. A guess at how many other cloud providers would host a marketplace of that size would be a figure from memory, and nobody could tell it apart from the two columns that are real.

One thing can still be said. The payment provider takes the smallest share on the list at 9.0 per cent, would take 12 weeks to replace, and 100.0 per cent of the flow across the marketplace passes through it. Every one of those is a fact about continuity: it tells what a stoppage would do. Carrying the whole flow says nothing about whether somebody else would carry it, so not one of them is a fact about terms. The two questions from the opening are still two questions here, and this table can only answer one of them.

How far does a buyer have to be willing to wait before the choice runs out?

There is one reading of both tables that a sorted list will never give, and it takes a control to feel it. Instead of asking who is biggest, the question becomes how much of what each business pays outside goes to parties that would take at least a chosen number of weeks to replace. Every party on both tables needs at least a week, so at a wait of one week the answer is 100.0 per cent across six parties for Anjani Stationers and 100.0 per cent across six for Setu Bazaar. The panel opens there, with the two published tables reproduced exactly.

Why can a set of accounts never convict an input seller?

Every rate a business paid is in its books to the rupee. Somebody entered it, somebody checked it, and it will still be there in seven years. Nobody quoted the rate it could have had and nothing was agreed, so there was never anything to enter, and that rate is nowhere. An account records the rate that was accepted and never the rate that was available.

Follow what that does to a reading. A paper bill goes up by a tenth. Two completely different things produce that identical line. A supplier holding the terms and using them is one. A buyer who stopped asking, let the arrangement roll, missed a season and took what was in front of them is the other. From inside the accounts those two are the same entry, in the same ledger, in the same handwriting. The separating fact was never a figure in this business at all, so no amount of care with the figures separates them.

Three things would settle it, and they are the same three every time. How many other parties would do the job. Whether any of them was asked. And what they said. For the paper mill the first of the three is published and the other two are not, and that is as far as anybody can honestly go. Notice how modest that is even in the best case here, where the answer is unusually clear: nine is a strong enough count that the conclusion holds anyway, and it would not have held if the count had been two.

What goes wrong when one ranking is asked to answer both questions?

Nobody in this failure is being careless, and the care is exactly why it survives a review meeting. Every step in it is defensible on its own.

How would a claim about supplier power be checked?

An analyst does this when a filing says a company has strong supplier relationships, a lender does it when a borrower explains why an input bill jumped, and a household does it without naming it when it decides whether the plumber who always comes is a convenience or a position. Four questions, asked in order.

Applied to the material here, the four questions get only so far. On the paper mill, the first is published and the second is published, and the third is not published anywhere: nothing says when any of the nine was last asked. One rupee a ream moves Rs 75,000/-, so the fourth is published for paper alone. On every one of Setu Bazaar's six, the first question cannot be answered at all, so the other three have nothing to stand on. The four questions are not a checklist to be ticked; they are four places to discover that something is not known.

One habit is worth carrying away from this. When a supplier arrangement is being described, the thing to listen for is whether the description is about time or about choice. Long relationship, deep integration, hard to replace, critical to operations: every one of those is about time. None of them is about choice, and choice is what decides the terms. Two streets away there are nine others who would take the order tomorrow, so a party can be all four of those things and still quote a rate it knows it has to keep sharp. The second thing to listen for is what else is being decided alongside the rate, and credit termsThe stretch a buyer gets between taking delivery and settling the invoice, plus whatever follows if that stretch runs over. Two arrangements struck at one rate are not one deal when one of them waits far longer for its money. are part of what a buyer agrees to as surely as the figure on the invoice is, and a seller who cannot move the rate can sometimes still move those.

Each set of six shares comes to 100.0 by construction. Rs 1,57,50,000/- over 75,000 reams gives exactly Rs 210.00 a ream. The two ratios, 13 on the weeks and 11.5 on the size, come from the columns printed beside them. No rate is published for any counterparty except paper, so no rate sits against any of the others.

What is settled elsewhere?