What benefit does few suppliers strategy provide to buyers?

The few suppliers strategy offers significant advantages to buyers, notably through value creation achieved via economies of scale. When a company decides to source its materials or components from a limited number of suppliers, it often leads to larger orders being placed. This concentration of demand typically enables the suppliers to streamline their production processes and reduce costs, which can be passed on to the buyers in the form of lower prices or enhanced service levels.

Moreover, by working closely with a select group of suppliers, buyers can foster stronger relationships, leading to improved collaboration and communication. These connections often result in better negotiation outcomes, shared innovations, and joint improvements in efficiency, further driving down costs and increasing the value received.

In contrast, a strategy involving many suppliers might seem to enhance competition; however, it can also lead to fragmentation of orders and increased administrative costs, which detracts from potential savings. Similarly, short-term contracts typically don’t provide the stability required for optimizing supplier relationships and the related value creation that longer-term engagements can offer. Therefore, the few suppliers strategy is aligned with achieving value through operational efficiency and cost reduction due to economies of scale.