Sourcing Expert Series 01: What a low price tag is costing you?

Since the US-China relationship was intensified in 2018 and, now even more, with the shortage of some medical supplies after the spread of the COVID-19 pandemic in 2020, the debate on global supply chains has ignited. Issues such as international relations and security concerns are driving the debate on the need to restructure global value chains even further.

The old price vs quality topic drew well-deserved attention once again across businesses and consumers. Back in the 70s, business owners flocked into the Far East, hoping to find the cheapest goods from “the world’s factory”[1]. However, not until recent years did the businesses and their consumers begin to realize the danger of the low price tags: low quality. PROFIT MARGIN OF A GOOD SOLD = PRICE - COST. When being “cheap” is the only value proposition, for-profit merchants, inevitably, are left with the cost end to play with, such as lowering product quality.

Don’t get me wrong – this model works perfectly during normal times. However, when things get tricky, like the economic downturn we are experiencing now, the once successful price warriors can transform into stealing monsters, who would do everything to protect the bottom-line. For example, a manufacturer may use inferior raw materials or lower the maintenance frequency of its production machinery to cut down the production costs[2]. Let us think in this way, are your goods’ quality, safety guidelines, and even legal and compliance requirements on the merchants’ “to-cut” list? You could only find out the answer a few months later, after the goods arrive at your warehouse. Every purchase then puts your operations and hard-earned reputation at risk. Any instability of product quality would possibly result in parts that are out of standard and may lead to failures in your business activities. Not to forget, you may also have to spend few months to source and qualify for new suppliers. The alluring low price tags would end up costing you much, much more[3].

Indeed, low prices are tempting, and having a number in your Excel file always makes it easier to evaluate vendors thousands of miles away. Yet, is this practice always good for you and your customers? After all, PRICE IS JUST ONE OF THE MANY FACTORS that helps sourcing professionals to form a purchasing decision. After this first article in our Sourcing Expert Series, Team ZONBIX will be presenting other factors to be considered, such as quality of products, your candidate’s qualifications/ certifications, and many more that can even be quantified in your sourcing protocols. We will also be introducing other topics to look out for when sourcing globally, such as child-labor production and the raising awareness in businesses’ social and environmental responsibilities. Stay tuned by following ZONBIX on LinkedIn!

DISCLAIMER: This article was written for ZONBIX clients and business partners as an insightful resource. It is not intended to provide financial, economic, or medical advice or any advice related to specific risk circumstances. There is a general nature of information written in this article and we fully advise readers to obtain more information from reputable sources. Although the creation of this article has been carefully considered, ZONBIX does not promise, reflect, or guarantee completeness or quality for any reason and is not responsible for any damage suffered in any manner by anyone who may rely on it. This article has been compiled using information available to us up to its date of publication.