CHEAP PRODUCTS ARE EXPENSIVE
It is often said that whenever you buy cheap products, you buy twice. People often scoff at such sweeping statements but there is an element of truth surrounding such purchases. During difficult economic times, the reality is that price issues will always bubble up to become the most appealing variable, forcing supply chain professionals to encounter a run-in with cheap purchases. During tough economic times, there is a natural inclination to buy the cheapest products. It is done with the best of intentions. Buying cheap is obviously less painful on the wallet. However, often times, cheap things are fragile, they can break anytime. In other words, supply chain professionals have come to terms with the fact that, by buying cheap, you often get what you pay for – poor quality.
Every procurement professional expects to get a bang from spending their dollars but the value for money concept will only go as far. For public procurement supply chains to strive, fiscal responsibility starts with spending with care. Top management believe that cost control is the best avenue for improving the bottom line. However, paying too much attention to prices can become very expensive for both your purse and your stress levels. The initial financial appeal of low-cost pricing structures is often more complex than it appears. The aches and pains that you go through after buying cheap may not be worth all the noise associated with cheaper products.
Procurement professionals must be reminded that it is advisable to pay more for a durable product which will save you a great deal of costs – and headaches – down the line. Although buying cheap products seem to imply that procurement professionals are frugal, over the years the cost of replacing cheap products will always add up. The traditional touchstones of supply chain success seem to suggest that there are hidden costs associated with cheap products that often go unnoticed. Some products or commodities are of better value at twice the price. With quality products, procurement professionals will only need to pay once. Quality products are renowned for the provision of outstanding value over years of durable use, although they may take away a significant cash outlay at the time of purchase.
Price will always remain a significant factor in procurement decision making. After all, negotiating for bargain prices is the right thing to do. But it is important to remember that the cheaper a product is, the more corners are being cut to produce it. Lowering costs to win tender awards can mean using lower-quality materials. Low costs suppliers often reduce their expenses by using substandard materials, employing less skilled labour, or taking shortcuts in the manufacturing process. Supply chain professionals must therefore avoid buying goods which will end up being used for the sake of a throwaway experience. Supply chain professionals are mindful that overspending is a challenge for budget compliance, it must be equally considered that underspending can be an equal challenge. Poor quality can be a cost to the business. Poor quality products can actually cost your reputation as a business.
Poor quality products affect everything downstream; they have a domino effect in the supply chain ecosystem. The organization will be affected by the rate of returns by unsatisfied customers, the cost of bloated inventory is inevitable (poor quality products don’t often sell that very well) profit margins will be compromised (poor quality products may be discounted or scrapped after being rejected by customers or user departments). With poor quality products, there is often a tendency for the cost of replacement and repairs to creep up as the product is used over the years. Buying more and more poor-quality products while paying less and less could end up delivering diminishing returns over time.
Savvy procurement professionals prefer high quality products which are built to last. Since such products are designed with more attention to detail, lifelong products will guarantee long-term usage by user departments. Supply chain professionals will be assured of timeless quality and extended guarantees, contributing to a positive cycle of longtime value. With quality products, the utility value of the procurement dollar will be spread out over many years of profitable use. Supply chain professionals must do all the heavy lifting with a view to ensure that the purchasing dollar is stretched over long-term value creation.
Before making procurement decisions, supply chain professionals must determine the optimal mix of unit price, performance standard, durability and reliability, supplier responsiveness to back up support as well as time-to-market dynamics. ?There is need to take into consideration hidden costs such as procurement costs, expediting costs, inbound transportation, outbound transportation costs, marketing and sales costs, quality costs, inspection costs, testing costs, rework costs, storage costs, scrape costs, warranty costs, customer return costs, lost sales cost and end-of-life disposal costs. Extending the focus beyond unit cost will unearth other sources of value for the supply chain network.
It is often said that in many cases it may be important to pay a little more for a bespoke product that will give you what you are exactly looking for than opt for a one size-fit-all product. It may be necessary to consider non pricing factors such as product quality and offering, vendor stability, reputation and innovation history. Procurement professionals are expected to focus on finding timeless pieces made from durable materials with good reviews and warranties. It is therefore important to buy products that are built to last. Savvy procurement professionals are fully aware that opting for quality products will obviously require an initial huge capital outlay, but it will pay off tenfold in terms of longevity and customer satisfaction. It is an investment which reliably pays for itself over time.
Supply chain professionals must seek to buy products that offers a protracted guarantee period. A long warranty period is a sign of durability. It’s a sign of good quality. It’s a promise to perform. Such high-quality products will continue to give value during its entire product lifecycle. It is important for supply chain professionals to remember to speak the language of durability. As the economic climate tightens, low priced products often open up a world of choices for consumers. The allure of buying potentially cheap products becomes universal. After all, a penny saved is a penny earned. But quality must always be top of mind.
The allure of low prices for commodities and services becomes undeniable for those supply chain professionals looking at optimizing cost savings. They know that any supply chain network with negative margins is doomed. Whether it’s a function of process efficiencies, or whether it’s a function of sustainable business practices, or whether it is a function of savings or everything else in between, value-based procurement is the right thing to do. Supply chain professionals must design formulas that can directly capture customer value and turn that value into shareholder value.
Procurement personnel shall also be required to carry out regular price reviews to temperature check what the business is able to afford within budgetary limits. It will, however, be important to take note that in the grand scheme of things the perception that low price equates to value can marginalize the supply chain process and hurt organizations in the long run. Supply chain practitioners must therefore ensure that supply chain network performance is judged on value and not just on price.
Supply chain professionals must ensure that they must continue to keep a pulse check on the pricing structures of the supply chain partners to ensure that they offer the optimal prices that are commensurate with the value of the product. It is an undeniable fact that cost is obviously a significant factor in determining a business’s profit and loss. The new economic era represents a unique opportunity for procurement staff to step up and redefine its playbook by knowing the difference between cost and value. It will help procurement professionals to be more surgical in their strategic initiatives of creating value for the business, potentially boosting profit margins in an era where every penny counts.
The old adage, penny wise and pound foolish implies that in certain instances, there is an over emphasis on price issues than on value. ?It’s therefore difficult to change overnight a way of thinking that has been practiced over centuries. Such kind of thought processes may significantly push value to the back seat. After all, in some cases, price and quality are not as closely tied to each other especially in instances when organizations are buying big-ticket items. This dilemma remains a hot spot in the supply chain, defying conventional wisdom. Although the allure of cheap products is universal, supply chain professionals must also take into consideration that the best suppliers are often not the cheapest. Others will probably tell you that low cost is low value, with cost efficiency built in, nothing ever comes cheap.
In an era defined by ambiguity and volatility, supply chain professionals must come up with broader strategic objectives that are crucial for steering holistic value creation over time. But there is need for collaboration between the supply chain community and procurement professionals to define what constitutes value rather than overly focussing on cheap products. Their thought processes and their actions must coalesce into actions that are meant to give ultimate value to the customer rather than concentrating on the supply of cheap products.
In a highly competitive business environment, supply chain professionals are familiar with restrictive budgets and cost pressures associated with running a competitive supply chain, but they should avoid purchasing low-quality cheap products. Those supply chain professionals who have been victims of the low bid paradox are fully aware that it may be important to prioritize value over mediocrity.
In conclusion, it is often said that cost is king. Cost is, and should always be, a foundational part of procurement’s raison d’etre. It is a familiar statement in business. Such statements are thrown around a lot with reckless abandon. In supply chain, low-cost commodities are seemingly believed to be what keeps the lights on. We live in a business world that is surely driven by prices. Supply chain professionals the world over will always continue to look for ways and means to stretch their procurement dollars. It is an immutable principle of supply chain management. Thought leaders in procurement must be in a position to crack the code and unlock the secret of what constitutes a viable and sustainable supply chain network. When all is said and done, cheap products and substandard products are expensive.
Charles Lovemore Nyika is a Supply Chain Practitioner based in Harare. For views and comments, he can be contacted at [email protected]