Price Strategies and the Structure of Supply Markets
An audit of existing supply market structures may show that they buying company may be in an unfavourable position.
Monopoly and oligopoly situations could restrict competition and thus weaken the power of the buyer as regards choice of suppliers and the negotiation of prices.
Factors purchasing needs to consider:
• Single or multiple sourcing
• Supplier appraisal methods
• Supplier performance
• Finding new suppliers
• Develop substitute materials from other suppliers to overcome shortages & resulting price rises.
Purchasing departments, especially in the larger organisations, therefore, need to develop strategies to control the flow of supplies at favourable prices.
“Counter” power can be developed in the following ways:
1.Develop price-cost analysis techniques to improve negotiating ability with existing suppliers;
2. Allocate business to more than one supplier as a means of preserving competition.
3. Encourage new suppliers to enter the market or develop foreign sources of supply to increase competition.
4. Contact the director general of fair trading to investigate monopolies and restrictive agreements if the public interest is considered to be in jeopardy.
5. Consider the possibilities of the buyer’s own company making the product.
6. Investigate the possibility of takeover or merger with a supplier in order to increase control of essential supplies.
Therefore buyers should not merely adapt to changes as they occur in the supply environment but should take positive steps to ensure that developments are favourable to their needs and protect their interests.
The pursuit of short-term price advantages may have unfavourable consequences in the long term if the price-cutting tactics of suppliers are designed to drive competitors from the market and to build up a dominant position.
