Cost vs Price: Is your supply chain undervalued?

We don’t all have the luxury of Tescos to offer loss leaders and continual low cost promotions. If you’re unfortunate you may even be supplying them and feeling the constant squeeze on your own margins.

We only use Tescos as an example as we all are aware of the very tight margins they operate which filters down to their suppliers and it’s something we all have to constantly contend with in business.

So we’re going to talk about Cost vs Price in the supply chain. Zig Ziglar, the famous and fabulously motivating salesman (RIP) made an excellent short video explaining the dangers of misunderstanding the difference between cost and price.

He states that price is what you initially pay for something and cost is the long term investment into that item. In logistics for example, you may see the price of one FTL at £1000 to be better than a similar FTL price at £1050, but what is the long term cost if you have downtime waiting for collection/delivery, if you can’t invoice because paperwork is late, if your client is unhappy with the lack of communication, or the time wasted chasing information or being lied to? That the quality of the cheaper FTL carrier is just not as good as the similarly but higher priced carrier which you then end up moving to anyway. In that time what has been the true cost to your business?

Whilst we’re not all salespeople closing deals you’ll get a better idea of cost and price by watching Zig Ziglar in action in this video that is less than 5 minutes long.

So most managers at one point are going to be asked to cut cost. Usually transportation will come into focus as an easy win. Everyone wants the cheapest price, “it’s essential to reduce cost” we tremble as our finger hovers over our carriers phone number.

There are a number of questions to be asked about a ‘cheap’ price though.

One, what exactly is a cheap price? “I need the cheapest price!”. So do you keep digging for cheaper and cheaper. When do you stop? How much time is this taking you and into what dangerous territories are you heading?

Second, if you get a cheap price (we’ll assume we know what it is now), then how are these cheapies able to be the cheapest.

My son is 7 years old and once a month he gets his pocket money and we head into town. Inevitably we have to walk past Poundland and the whining starts to go in. I know that if he buys something from Poundland by the end of the day it will be broken. So does he, we speak about it. Continually.

But still, he goes, he finds, he gets upset when it does exactly what we knew, either it breaks that day or the fun expires an hour later, usually the former.

Had he been a bit more patient (impossible I know) he would save a bit more and buy something he really wants and have more than a days worth of play.

After umpteen visits to Poundland the penny finally dropped when the police handcuffs broke before we got home and he now proudly states – as we pass the store no less – “I’m not going there, nothing lasts more than a day” and proceeds to Argos. That’s my boy!

Now to transport.

First, there is always a price that is cheaper. Always. Somewhere.

Now let’s fathom the cost to your business of seeking rock bottom.

Your client has certain expectations of your service and your logistics provider will be a reflection of this. A cheap price will probably mean cheap labour, cheap equipment, cheap ways of working, cheap insurance, cheap leadership, etc – ultimately a low quality of service.

So if your collections or deliveries are constantly delayed, your updates aren’t received, poor communication, paperwork missing/late, claims delays, etc, if you continually disappoint on your clients expectations they will go elsewhere. That is a massive consequence to a cheap price.

But we completely understand the need to shop around to reduce cost. Budgets have to be met.

So what to do?

We think it’s at least important to put a value on the necessity to have a consistently performing supply chain. Cut too hard and it will wobble.

Can your business afford uneven service levels? If it can and you accept the headaches then that’s ok, proceed as normal.

But if you feel it’s too important, that there’s too much at risk, that your goods deserve the utmost protection and you deserve the best service, then you need to take action. Come on, you can do it!

It’s not easy going back to a supplier who you’ve thrown out in favour of a cheaper but lesser service (I’m not going to use any jilted lover analogy), but I can assure you they’ll welcome you back with open arms. Like anything, we have to try things when the pressure is on. No-one should be vilified for this. After all, you’re the customer. But if it’s not working out then head back or forward to a safe space.

What is interesting about cheap in logistics is after a while you may experience price creep. An age old tactic of luring you in low then slowly introducing price rises. They understand how draining it is for you to change supplier – again! So you accept these small, incremental rises which all add up over time in the hope you haven’t got the energy to investigate.

You may be very surprised that on many occasions the price of a good service which gives you peace of mind whilst you go about your business is not much more than what you’re currently paying.

We see this all the time. A company has been putting up with a poor service for years, they’re paying an average price for this. We then take the reins and the customers sits in awe at something we take for granted – a good service. We sit perplexed that their old carrier, many of them established household names, dare to be so rubbish. It’s very frustrating and equally saddening. Customers deserve better.

Ultimately though it boils down to trust. If a client is expected to pay slightly more for a good service then we need to understand each others business and be as open and transparent as possible.

The market does change and pricing can sometimes get chaotic with seasons and currency, Brexit and continental sentiment, the last 12 months in particular. But occasions like these effect everyone in the industry, not just your provider, and as long as you, the customer remains informed by them and you really trust them, that they are looking after your interests and not simply looking to be opportunistic, then a harmonious relationship for the years can evolve.

Here we constantly survey the European market, speaking with hundreds of key carriers in every country and analyse every shift in pricing and the reasons behind it. With this information we work with clients to make adjustments where necessary in a way where the client feels informed and empowered.

So in conclusion, we’ve nothing against cheap, it has its place in some businesses. But we say know the cost of cheap and whether it sits well with your overall quality objective. If it doesn’t, and you think it’s about time you reviewed the market, make the move. Call us. We pride ourselves on service, we know what’s happening in the different markets, the prices, the reasons, and guarantee you won’t be shocked. Actually you may be, that you can get such a good service for such a good price.

Now, what exactly is a good price…

JS

04/09/2017
Author: Jon

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