The Human Cost of Putting Price Before Value

Posted on March 31st, 2015 by

Whether it’s a restaurant menu, an egg or a card for Easter or raw materials for manufacture, we all like to have a decent selection to choose from. There does, however, come a point in the “proliferation of choice” where diminishing returns set in. Confusion comes along, decisions are delayed and quality is harder to guarantee. How much choice does any discerning buyer really want?

In retail, ever more knowledgeable shoppers have begun to vote with their feet on this. Shunning the massive varieties of goods with which the shelves of the “Big Four” supermarkets are laden, they are heading in increasing numbers for the “discounters” – with no worries (or guilt) about a drop-off in quality. Big Four market share is predicted to fall from its current 42 per cent to 34 per cent by 2019, on this basis.

Smart buyers have come to understand that essential difference between the perplexity of a lot of similar goods being offered at “lowest cost”; and the “value for money” – and far less daunting experience – that can genuinely be achieved by simply narrowing the field of supply. This equation of improved quality and reduced waste (in this case, unhelpful and excessive “choice”) is hardly unfamiliar in the business world: but buyers can still take a lot of persuading when it comes to the benefits of “economies of scale.”

Although logical, it can feel counter-intuitive that focus on quality actually reduces cost and minimises risk – and vice versa. There’s an attractive but false security in having a lot of options: when, basically, there are more possible wrong choices to make. What’s required for continuous improvement is consistent focus on the value to be delivered by a select group of well-chosen suppliers with a stake in your customer experience and the confidence of a structured, sustainable relationship with you.

By making it emphatically not about lowest cost, you end up with best value. But old habits die hard. In the case of the retail sector, customers and providers alike have required progressive wake-up calls to get them to embrace change. We know from recent surveys that growing doubts about the driving down of costs through the use of child labour were surfaced even more dramatically with the emergence of the horse meat scandal. Subsequent revelations about the “bullying” of suppliers by the Big Four have also pricked the public conscience.

One reason why it took such stark news to get the message across was inertia. The UK retail grocery sector is rightly regarded as amongst the most sophisticated and mature in the world, a by-word for supply chain efficiency. The downside of that has been increasing complacency and, at its worst, an unchallengeable arrogance that has led, basically, to some instances of what we can only think of as pretty nasty behaviour.

This has presented all of us in Procurement with an unpleasant, if very useful, What’s Wrong With This Picture? A “How Not” guide to buying…

Picture of a Crowd

As we’ve seen, Step One appears to be to herd as many possible suppliers as you can into one “chain” (although “cell” might be more appropriate). Step Two? Well, another recent survey reported that one in five small firms had been the victim of “supply chain bullying”. The worst behaviour experienced fell into “professional” categories – or euphemisms – such as Pay to Stay, Long/Late Payment, Early Payment Discounting and Retrospective Discounting.

This isn’t just professionally unacceptable, it’s an abuse of language; worse still, it’s counter-productive. The truth of the matter is that, as one survey respondent spelt it out, “Most suppliers are paying between 25-30 per cent just to sell their product.” Meanwhile, the Institute of Directors has indicated the wider consequences of this travesty: it is “threatening to undermine the strength of the economic recovery.”

It also threatens one’s sanity… Remember “Drinka Pinta Milka Day”? Well, there has been a 50 per cent fall in the price of milk over the past 12 months. But this isn’t good for anyone, not even (well, especially) for the supermarkets, whose treatment of the staple as a “loss leader” brought the price down. According to the National Farmers’ Union, the number of dairy farmers in the UK could halve to fewer than 5,000 by 2025. It’s hardly going to count as a “win” when there’s no milk left to lead your loss with…

Lonely cow in field

And that point – encouragingly – is where the realisation came that something had to change. A chain with too many stressed links can never hold; short-term “returns on investment” ultimately collapse. Without decent human relationships, there can be no real sense of “value” or “quality” in any system.

The demand for “your lowest price,” backed up with menace, needs to change to the question: “How can we sustain your best service?” You can talk all you want about Tesco and the Groceries Supply Code of Practice; one respondent to a recent survey nailed it for us all in terms of what is really required: “Just being a bit nicer in general.”

The good news is that, at the worst end of things, common sense and decency are making a come-back; however belated. These, surely, make the ultimate difference any customer can experience; and they put “cost” where it belongs – in yesterday’s auction rooms.

It is increasingly acknowledged, not just that “lowest price” isn’t everything: it’s that “best value” puts everyone’s interests on a level playing field where the rules of play are based, above all, on human relationships. The really great news, of course, is that enlightened procurement professionals have known this all along.