The Risks Of Low-Margin Business

“Low margin businesses are particularly vulnerable to disasters beyond their control.” (Financial Times, November 26th)

Given the truth of this statement and the volatility of market conditions, it is critical that any Procurement strategy must be thoughtful about actions which:

– force down prices without adequate understanding of the consequences to the supplier’s margin

– consolidate the supply base to a) increase negotiation strength and b) cut administrative costs, but thereby reduce protection against ‘disasters’

– embrace global markets to a degree that significantly reduces the ability to predict or manage ‘disasters’

I am sure these factors are well understood in many organizations, but word on the street suggests that they do not necessarily translate into action. While Procurement measurements continue to be driven by short-term savings, the incentive to ignore these issues remains strong – and continues to leave many organizations seriously exposed to ‘disasters beyond their control’.

It can be hard to get the right balance between cost and risk. But a start would be through an understanding of the ‘costs of vulnerability’ – that is, the actual cost to a business that occurs as a result of selecting low price supply. This would of course be a cumulative number over a specified period of time and would capture the costs associated with supply disruptions, crisis management etc. that were a direct result of deciding to take the risk of going with a low-cost supply option.

Does anyone collect this data? Even if Procurement do not collect it, if I was a supplier under continuous pressure to cut my margins, I would be interested in establishing this data as part of my rationale for value through quality and reliability.