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Focus on price over value is the road to ruin!

Tue, 31 Jul 2018 - None

“What is a cynic? A man who knows the price of everything and the value of nothing.” Oscar Wilde

We can all be forgiven for focussing on the price of things at the moment. There’s been a real squeeze on household budgets for the last decade although the latest statistics from IHS Markit show household incomes growing at the fastest rate since 2016. But focussing on price and forgetting about value is extremely damaging in the long term to consumers, businesses and the economy alike. Endowment and Interest Only Mortgages are a really good consumer example of this fact. The white hot equity release market is being fuelled by not only the tail end of the baby boomers’ pension shortfalls, but by thousands of people coming up short as their mortgages are due. By taking the less expensive, or just plain cheapest option when they bought their houses, they unwittingly stored up trouble and expense for the future. Perhaps the pursuit of price in the form of lower monthly payments was at the expense of value and the security of owning their own home in the long term?

There are plenty of examples of this malady causing problems for businesses too. A recent cautionary tale, which is still very much being told at the time of writing, is that of KFC. The global quick service restaurant giant switched its supply chain in the UK away from its established partner, Bidvest, to DHL. The problems that ensued when the switchover happened, at their height, resulted in many of their 900 UK restaurants being forced to close as supplies ran out.

Weeks later and many are still operating a limited menu as the issues continue to at least some extent. We visited a couple of KFCs this week and witnessed limited menus as well as lack of basic supplies such as serviettes and large cup sizes.

At the peak of the problems analysts Stifel estimated that the crisis was costing KFC over £1.5M a day in lost sales. They’ve been forced to act in the most ironic way by shifting the supply chain for their 350 stores in the North of England back to Bidvest, a move which was announced earlier on this month and took effect yesterday. We are left to wonder what all the parameters in the decision to move to a new logistics partner were back in November last year that resulted in the problems starting in February and the re-engagement with Bidvest . We can’t help thinking though that lower prices per delivery might well have been a factor as DHL, transitioned from the 5 distribution centre model run by Bidvest, to one central hub in Rugby. Regardless, the reaction from Bidvest on social media was restrained, but nevertheless priceless.

All good fun, but a salutary lesson for us all in our own businesses. We mustn’t lose sight of value in tough times, or in good times. Price is only one contributing element in the value equation and we can’t be seduced by short term reductions and cost savings. The corollary, though, is that low price doesn’t necessarily mean poor products or services. The point is that price isn’t the only factor. Sustainability and performance come into it too.

At SME Advisers we work with our clients to help them make better decisions when it comes to procuring products and services. We use our proprietary Procurement Value Wheel model to work through the dynamics of Sustainability, Performance and Price, side-by-side with our clients, to facilitate better procurement decisions in a thoughtful and strategic way. Get in touch to find out more.


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