The Importance of Suppliers (AQA A Level Business): Revision Note

Supply chain transparency

• Supply chain transparency means a business being open about where its materials and products come from, and the conditions under which they are made

• Businesses increasingly publish information about their suppliers and sourcing, and rely on external certification schemes, rather than relying only on their own claims

The purpose and value of supply chain transparency

• Builds trust with customers, who increasingly want to know where products come from and how they are made

• Reduces reputational risk, as it becomes harder for problems such as poor working conditions or environmental damage to go unnoticed

• Provides independent, credible assurance that standards are being met, which carries more weight with customers than a business's own claims

  • E.g. Fairtrade certification is independently checked by FLOCERT, an accredited certification body

  • This gives customers confidence that farmers have received a fair minimum price without having to verify this themselves

• Can differentiate a business from less transparent competitors, supporting premium pricing or customer loyalty

Example

Nestlé publishes supplier lists for commodities including palm oil, cocoa and coffee, and can now trace over 99% of its palm oil back to the mill where it was processed

Influences on the choice of suppliers

• Choosing suppliers involves decisions about both how many suppliers to use and which suppliers to use

• Using a single supplier can allow closer relationships and potentially lower costs

  • However, it leaves a business vulnerable if that supplier fails

• Using multiple suppliers spreads risk and increases flexibility

  • However, it can be more complex and expensive to manage

What affects the choice of suppliers?

Influences on the number of suppliers used

• The level of risk a business is willing to accept from relying on one supplier

  • A business more comfortable with risk may rely on a single supplier to secure better prices or a closer relationship

  • A more risk-averse business spreads orders across several suppliers to protect itself

• How easily a business could find and switch to an alternative supplier if needed

  • Where alternative suppliers are readily available, a business can safely rely on fewer of them, since switching quickly is possible if problems arise

• Whether the product or component is highly specialised, making multiple suppliers harder to find

  • Specialised materials or components may only be available from a small number of suppliers

  • This forces a business to rely on fewer sources even if it would prefer more choice

Influences on which suppliers to use

• Price and payment terms offered by each supplier

  • Lower prices and more favourable credit terms reduce costs and help cash flow, making a supplier more attractive to work with

• Quality, reliability and capacity to meet the required volume

  • A supplier must consistently deliver the right quality and quantity on time

  • Failure to do so can lead to production delays and customer dissatisfaction

• Ethical, environmental and legal standards, particularly where a business values or requires accreditation

  • Choosing suppliers that meet recognised standards reduces the risk of reputational damage and satisfies customers who care about ethical sourcing

• Location, which affects delivery times, transport costs and exposure to disruption

  • Suppliers based closer to a business typically offer faster, cheaper delivery

  • They are also less exposed to risks such as long-distance transport delays

Example

Apple has increased iPhone production in India and expanded component manufacturing in Vietnam, reducing its reliance on a single country, China, after COVID-19 disruption exposed the risks of depending too heavily on one location

Profits in the supply chain

• The distribution of profit along the supply chain refers to how the total profit made from a product is divided between the businesses involved in producing, distributing and selling it, such as growers, manufacturers, distributors and retailers

• The share of profit each business receives depends on factors such as bargaining power, brand strength and how replaceable each stage of the chain is

Influences on the distribution of profits

Relative size and bargaining power

• Larger businesses, such as major retailers, can often negotiate lower prices from smaller suppliers

Branding

• Businesses that own a well-known brand can often achieve more profit than businesses producing an unbranded component

Number of alternative suppliers

• Producers who are easily replaced typically have less power to negotiate a higher price

Ethical trading schemes, such as Fairtrade

• These set a guaranteed minimum price to protect producers regardless of market conditions

• Coffee farmers typically receive around one per cent of the retail price of a cup of coffee, with most of the value awarded to roasters, retailers and coffee shops