Buy cheap or pay for reliability?
Companies often approach this from the wrong angle – the answers don’t depend on means; they depend on purpose
GLOBALISATION has retreated due to economic warfare between the East and the West. The supply chains have been severely buckled by the Putin War, the aftermath of Covid-19, and some fundamental switches of behaviour by consumers. Gathering climate storms are another cause of changes in where, how and why people live the way they do. It’s not a new world. It’s an old world, exhausted by our demands on it.
Not, you might think, a good time for nations or groups of countries to compete for Top Dog, and yet the ferals in human nature drive ambitious leaders to ever more dangerous behaviour, ever more threatening postures. I think it will push them over the brink into at least the first moves in a devastating war. Hopefully swift and decisive reactions will limit the ultimate damage but there is no certainty about that.
Continued profits and survival
The investor and the businessman continue to seek profit as their aim, though their targets are already modified. Their objectives will need to change more fundamentally if humanity, in anything like its present form, is to survive. Until they are, maximising the return on investment will remain the rainbow’s end for the chief executive officer making his buying decisions and the chief product officer trying to implement them to the best of his ability. The chip chaos, a blocked Suez Canal and the supply chain in disarray press new priorities on management – who are already overwhelmed by laws, guidelines, regulations and a mystifying lack of consistency in investor demands. The purpose of a manufacturing business – to buy, to make, to sell for profit - is lost in procedural idiocy. No wonder relations between regulator and regulated are disastrous.
Globalisation was the touching belief that international trade could smooth the path of rival political ideologies to the point where functioning economies would pave the way for a more sensible world. They hadn’t bargained for Putin et al. And they didn’t believe the climate was in such a serious condition. Bereft of a sensible middle-ground political position they tried to seize Capitol Hill, Washington. ‘Ya-boo’ is neither good politics nor good sense.
Your dilemma
Here’s the ”Materials Buying Dilemma”. Do you source from the cheapest supplier even if he is located far away, uses a different language and has a patchy record of prompt delivery? Or do you go for the more expensive source nearer to home, communicates easily and is a punctual supplier? The question is more complex than that, of course. Specifications that meet your needs, reliability of the supplier’s own raw materials source, ability to recover costs and lost profits from cheaters, originator’s design and creative abilities, manufacturing and distribution skills, all play important parts in the decisions of where to buy. What decides “who to buy from”?
Companies often approach this from the wrong angle. All the points I have made are about “means”. But the answers don’t depend on means, except, perhaps, to a minor extent. They depend on the purpose of the product or service and where it is pitched in the market. Take the case of the expensive watch trade. A combination of travel-restricting Covid-19 and high inflation has increased the value of this business even to the surprise of those familiar with the vicissitudes that drive it upwards. Makers of these high-priced luxuries must now redefine the purpose of their product before they decide how and where to buy the raw materials to make it.
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On the other hand, if you are producing a purely utilitarian product you may consider this a time to re-specify it and aim it at a more cost-conscious part of the market. That would, no doubt, get you a bigger market share and allow your dominance to better determine the factors deciding your profits and growth. Which supplier would you expect to source for these two very different products? Not the ones you might instinctively think. The speciality watch buyer has patience that will keep him loyal far longer than the repeat purchaser of the utility. Quality and durability will be other factors to consider but on the basis of patience and loyalty the aspiring horologists can be kept waiting, whereas the utilitarians probably can’t.
The dreaded change
Redefining your product is one of the hardest things producers have to do. It was invented or created – possibly even by you – for a well-thought-through reason, a gap in the market thoroughly researched and meticulously specified. You dread the risk associated with change. You shrink from the costs involved in re-engineering. You worry about the damage to the bottom line of increased explanatory advertising. Most of all, you question the loyalty of your well-tuned, experienced team. Preparing them for a product review is the most important of all the things you must now do. Other people dislike change, too.
Product modification that involves carrying the consumer is a tough path to climb. I generally preferred to launch a new version of the product even though it cannibalised some of the existing sales. When we saw there was room for improving Brand’s Essence of Chicken by reverting to an earlier formulation we had the option to “change and explain” or to relaunch as “The Original”. We chose the latter and it proved to be the better option. The competitive enthusiasm such a step generated more than made up for loss of original product volume, and the pricing opportunity it provided repaired the gross margin dramatically. I’m not suggesting it’s a rule, merely a thought. It does have one added advantage. You can source your raw materials wherever you want. The product is new, its specifications don’t have to be identical to the original concept.
New growth, new opportunities
There is another reason for looking to new products as a source of growth. The consumer still has favourites to which s/he is loyal, but s/he is now used to regular product improvements and your competitors will be promoting and producing such variants. The brand or company name will likely support much of the cost of a new product launch. You need to be careful here, though. I have recently seen two attempts by major companies to attach totally new and unproven products to a range of established ones with disappointing results. I do not know the figures since they are carefully guarded secrets but the promotional activity declares a budding failure. There will possibly also be some damage to the brand names under which they are being launched and thus to the existing, established and profitable products.
Evidence of product performance today must be more than “Tests prove”.
Disruption is the name of the game for the next couple of decades. Handling change well is already a top requirement for today’s management. Using the changes as spurs to new thinking and improved products is what will sort the men from the boys. In the past too little attention has been paid to raw material sourcing. As the world’s precious metals and rare earths get increasingly used up, greater attention to this formerly plebeian aspect of making a living will pay handsomely.
Handled properly it will inspire new and vibrant products and profits.
The writer is founder and chair at Terrific Mentors International
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