Many small businesses today are taking the lead from the big dogs with aggressive cost cutting to grow their bottom line. And with our wide-open trade policies, even small companies can tap into the cheap foreign goods markets to facilitate this often, difficult task.
While I applaud companies for their continuous efforts at improving the bottom line, I feel compelled to issue a word of caution.
Make the big picture a part of your decision-making process to avoid the old proverbial penny-wise and pound-foolish syndrome. Cases in point – Spinach containing E. coli, melamine tainted pet food and toothpaste laced with anti-freeze.
Big companies may be able to recover from such major problems but such events are very likely to wipe out smaller companies. Following are some ideas that may help when evaluating whether to use cheap foreign (or domestic) materials or products in your business.
1) What are the true costs? In other words, what other financial (quantifiable and not quantifiable) impacts will there be if I use this cheap product? Examples – Additional inventory costs due to long shipping times, additional testing costs to insure the product meets your quality standards, longer lead times for your customers causing unhappy customers as well as longer exposure time to order cancellations, distractions for management due to more complex logistics and difficult communications, and many other areas that may or may not be unique to your business.
2) What are all the risks? I.e. lawsuits from tainted food products, increased product failures for you and/or your customers, image, product or name tarnish lowering your status to a commodity as opposed to a value added supplier.
3) Finally, keep in mind it doesn’t have to be a decision of ‘Do I use this cheap product or material instead of a more expensive product or material’. Rather your decision process can be more like ‘Is there another less risky move I can make to achieve this profit improvement such as
a. Finding new higher value added markets
b. Improving your product mix
c. Growing the top line by selling more products or higher margin products to your customers and even
d. Eliminating customers that are much more costly to serve than your average customer costs to serve so as to streamline your manufacturing and customer service process.
Unfortunately a complex world requires complex business decisions, but done right and you can continue your continuous profit improvements without waking up one morning to find you or your supplier making front-page headlines for a potential disaster.
Ron Stone is a veteran financial consultant. One of his specialties is 100% No Doc Commercial Mortgages. For more information visit him at
No Doc Commercial Mortgages
