2-9 Perform Switching-Cost Analysis

2-9.1 General

Switching costs are incurred when the purchasing organization changes suppliers. These costs affect the Postal Service decision of whether to consolidate suppliers as part of its sourcing strategy and will also influence supplier development activities.

The exercise of evaluating the extent of competition in the market, combined with internal research, can lead to new findings on market dynamics, such as:

• There are new suppliers who are worth investigating for relationship development.
• Another supplier is expanding its expertise or product offering to include those offered by other suppliers, and the Postal Service can exploit its volume more effectively through fewer suppliers.
• The Postal Service is sourcing similar products or services from relatively generic suppliers.
• The Postal Service is losing bargaining power with certain suppliers because of the reduced degree of competition in those markets and must consider exploring backup suppliers as contingencies should the relationship with the current supplier prove no longer fruitful.
• Another supplier is offering a new product or service that can meet Postal Service demand more efficiently than the current supplier.

While those observations need confirmation under a host of other operational and organizational factors, they warrant consideration to switch suppliers or consolidate them to reap better terms for the Postal Service. From a purchasing perspective, the purchase/SCM team needs to recognize how switching costs arise and how to minimize them in the purchasing process, specifically in its decision to consolidate suppliers or develop new ones.