The fifth part of Michael Porter’s Five Forces we will be taking a look at Supplier Power, which is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.

Thomas Volrath Managing Director of Pipex Communications Hosting will be exploring how easy it is for suppliers to drive up their prices and how that in turn can affect your business, what strategies you can use in order to stay ahead of the game and which industries are most affected and dominated by Supplier Power.

Choosing the right supplier
When choosing a supplier, first of all, you need to look at what function you want the supplier to fill. Is it going to be a short-term deal, filling a gap while you sort out an in-house solution or work on a particular project? Are you looking for a longer-term commitment, to create a relationship with that supplier that goes far beyond simply paying them for goods or services? Or are you somewhere in between? Generally, businesses will be looking for a reliable, trustworthy supplier. They need someone who can deliver on time, without throwing up any unexpected surprises. The most important aspects of any supplier are reliability, flexibility, culture and price.

The amount of research a small business needs to do, in short: as much as is practical. It is really important to do your homework when choosing suppliers. To begin with, businesses will want to trawl the market to see who might be able to offer what they need. They can do a lot of this without leaving the office – a few minutes on Google can be enough to get a feel for what's out there. Personal recommendations are one of the best ways to find a good supplier, so businesses should not be afraid to ask their contacts for assistance. Industry associations often maintain lists of trusted suppliers in their sector, so it's definitely worth contacting them too. Organisations like local Business Links and Chambers of Commerce can also point business owners in the right direction. At this stage, the business should look to build a shortlist of a few suppliers who look like they can supply what the business is after. Then it's time to approach each one of them directly. Explain what you want and ask them to send over a proposal. If the size of the deal warrants it, get each of them in to pitch for the business. There's nothing quite like eyeballing someone to get a feel for what they want from a deal and how sincere they are. If you're entering into a significant financial commitment then you want to be as sure as you can that the supplier you choose is the right one for your business. Escaping from an unproductive relationship with a supplier can be a painful process, especially if you signed a long contract, so it pays to do the legwork before making any commitment. Always ask each prospective supplier for references, but bear in mind they'll only give you details of clients who will say all good things. If you can, track down some of their customers independently. If they're going to supply a physical product, get them to send you a sample - but again, remember that they're bound to send you the most perfect example they can get their hands on.

Price will always be a consideration, but I've never seen a situation where it's been the only thing of importance unless it’s a limited time deal. Businesses have to remember that they're entering into a relationship with another company. They will probably have to depend on this company to supply quality products or services on schedule, and so it's really important to consider factors other than just cost. Having said that, it doesn't follow that cheap is necessarily bad. Businesses - especially those which supply services rather than a physical product - frequently underestimate what they are worth to their clients, so don't dismiss a low-cost quote because it sounds 'suspiciously cheap'. It might simply be that the supplier doesn't realise what their clients would be willing to pay. It helps if a company can try and estimate a supplier's margins. If the price the supplier is offering does not look like it can cover their costs then be wary.

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