The Procurement Glossary » Leverage

Leverage

Sourcing & RFx

Definition

The relative bargaining power a buyer or supplier holds in a negotiation, driven by factors like volume, alternatives and switching cost.

Explanation

Buyers gain leverage by aggregating volume, having credible alternatives, and reducing dependence on any one supplier. Suppliers gain it through unique capability, scarcity or high switching costs. Understanding the balance shapes a realistic sourcing strategy.

Example

Consolidating spend across five sites gives the buyer enough volume leverage to secure tier-one pricing.

Related terms

• Negotiation — The discussion between buyer and supplier to agree price, terms and conditions before a contract or order is placed.
• BATNA — The Best Alternative To a Negotiated Agreement — a party's strongest fallback if the current negotiation fails.
• Supplier Consolidation — Reducing the number of suppliers in a category by concentrating spend with fewer, better-managed vendors.
• Spend Under Management (SUM) — The proportion of addressable spend that is actively managed by procurement through contracts, sourcing and controls.

Frequently Asked Questions

What is Leverage?

The relative bargaining power a buyer or supplier holds in a negotiation, driven by factors like volume, alternatives and switching cost. Buyers gain leverage by aggregating volume, having credible alternatives, and reducing dependence on any one supplier. Suppliers gain it through unique capability, scarcity or high switching costs. Understanding the balance shapes a realistic sourcing strategy.

Can you give an example of Leverage?

Consolidating spend across five sites gives the buyer enough volume leverage to secure tier-one pricing.

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