Bargaining Power of Suppliers
In the apparel industry, commodities and undifferentiated products, such as cotton, are purchased in the manufacturing of goods sold to customers. Also, cheap labor is abundant overseas for manufacturing needed products. Switching costs are low for this industry, allowing firms to easily pick and choose which suppliers they would like to do business with since suppliers offer very similar products, which gives suppliers in this industry low bargaining power. Price Sensitivity
In the specialty apparel industry there are many textile companies to choose from when looking for suppliers, therefore companies are able to pick and choose which manufacturer best meets their needs. This drives suppliers bargaining power down. With apparel manufacturing, cotton represents a large portion of their manufacturing supplies, so firms are willing to consider supplier prices a high priority. The only obstacle that could hinder a firm’s ability to use some suppliers would be trade restrictions (Gap Inc. 10-K 2006). Labor in the US is far more expensive than in foreign countries so many apparel companies choose to outsource much of their manufacturing to countries outside of the US. Throughout the years, the US government has continually tried to increase the required minimum wage which pushes firms in the apparel industry to outsource their manufacturing overseas. Overseas manufacturers with attractive labor costs must remain competitive in order to have customers, which gives suppliers low bargaining power relative to the firm.
Relative Bargaining Power
There are a large number of suppliers for the apparel industry. Retailers have the opportunity to obtain their supplies from more than just one supplier. In the case of Gap Inc., they use 780 different vendors around the world to purchase merchandise from, giving Gap bargaining power. The major suppliers are based in China, representing approximately 20% of merchandise, while the rest is purchased from vendors in 50 other countries. Other firms in this industry such as Abercrombie & Fitch also purchase their supplies from companies overseas. Suppliers must compete for decent quality and low cost in this industry because retailers want to have the cheapest costs of goods while also trying to maintain quality. Due to the large number of suppliers in the apparel industry and the need for the suppliers to be highly competitive with one another, suppliers have relatively low bargaining power. The specialty apparel industry has a high level of rivalry among existing firms due to competitive firms trying to maintain growth and gain market share.
It is important to be a large firm and differentiate yourself from competitors in this industry. Another reason rivalry among existing firms is high in this industry is because firms must maintain low costs relative to their competitors. Threat of new entrants in this industry is low because size once again an important factor keeping potential firms from entering this industry. Also the first mover advantage does not provide benefit to potential entrants and channels of distribution are hard to achieve with the existing relationships that firms already in the industry have. Threat of substitute products is moderate in the specialty retail industry because while there are no substitutes for clothing, customers still have the option of different types of clothing. Bargaining power of buyers in this industry is moderate due to customers having some power over firms because their business is needed but successful firms do not depend on one customer to reach their profits. Bargaining power of suppliers is low in the specialty apparel industry because there are a large number of suppliers for firms to choose from based on lowest price and highest quality.
This debate will occur next Monday – November 4, 2013. Each member is responsible for their part as well as being a part of the group discussion/debate. As such, each member must turn in their portion of the exercise in a paper no less than 2 pages making sure that each point of these crucial elements is addressed. Grading will be 70% for the individual work and 30% for the contribution to the group.