The phantom benefit of low prices in В2В procurement
Low prices in procurement: is it good or bad?
The question of low price in procurement worries many people, especially newcomers: is it really profitable to work with a supplier offering the lowest price? At first glance, the logic is simple - the lower the price, the greater the savings. However, experienced professionals know that such an approach can lead to serious risks. Price itself is only one of the factors, and to focus solely on it means to miss more important aspects: the quality of goods, reliability of supply, level of service and long-term stability of the partner. What seems favourable at the stage of concluding a deal may in reality lead to hidden costs, delays and even financial losses. Therefore, a professional approach to procurement requires a balanced analysis, not a blind focus on the price tag.
In this article we will tell you in detail what the disadvantages of working with the lowest price supplier are; what problems they cause; what risks they pose to the business; what impact they have on the work of the procurement department; and how these disadvantages can be levelled.
1. Reduction in quality
Problem: A low price may be caused by poor quality of the goods or services supplied. The supplier goes to reduce the quality to offer a lower price in order to win a favourable contract.
Business risks: Receiving products or services that do not meet standards. Additional costs for rework or product returns. Reputational damage to the purchasing company.
Consequence for the purchasing department: More time and resources need to be spent on monitoring compliance with standards.
How to avoid: Consider not only price but also quality criteria when evaluating a supplier. Conduct a thorough vetting of potential suppliers before selecting a winner.
Supplier selecting based on a set of criteria
2. Supply instability
Problem: A low-price supplier often uses less stable supply chains. This leads to delays or unpredictability in delivery.
Business risks: Disruption of production processes. Disruption of project timelines. Increased costs due to the use of emergency measures to restore delivery schedules of products, for example, of industrial hardware.
Consequence for the purchasing department: At any time, the department must be prepared to respond quickly to any disruption in logistics and find alternative solutions to maintain supply stability in B2B.
How to avoid: Include penalty clauses for delays in contracts. Conduct regular monitoring of supplier performance at all stages to prevent problems in advance.
Monitoring of delivery schedules
3. Lack of long-term savings
Problem: Although the initial cost seems attractive, choosing the cheapest option results in higher costs in the long term due to potential quality and reliability issues.
Business risks: Direct financial loss. Increased administrative costs for additional efforts to resolve problems that arise.
Consequence for the purchasing department: Need for additional calculations. Total Cost of Ownership (TCO) must be considered when making a decision, not just the initial product/service value proposition.
How to avoid: Evaluate the TCO of all proposals from potential partners to ensure they provide the best overall value
4. Conflicts between the parties
Problem: Low contract value sometimes causes contractors to operate at a loss. They then seek to recover their losses through litigation for additional costs or changes to the contract terms.
Business risks: Risk of disputes and claims. Increased legal or litigation costs.
Consequence for the procurement department: The need to resolve disputes directly within the department or to file documents for court judgements.
How to avoid: Use a flexible approach where the interests of all participants in the process are agreed in advance to minimise conflicts.
Ability to negotiate with the parties to the transaction
5. Incorrect formation of expected price
Problem: Low prices lead to distorted market expectations. It also creates problems for future purchases of other components, as the customer is oriented on overestimated or underestimated base prices (of the current contract).
Risks for business: Incorrect estimation of the real cost of own projects. Financial losses due to the need to adjust the budget during contract fulfilment.
Consequence for the procurement department: Need for more thorough market analyses and real cost estimation.
How to avoid: Use historical market price data. Carry out base price accounting of the current contract for future tender prices to avoid the impact of abnormally low bids. Conduct regular monitoring of changes in the cost of raw materials or services to better estimate expected costs in B2B.
6. Inadequate after-sales support
Problem: The supplier fails to provide adequate after-sales support due to limited resources. Or withdraws from any contact at all.
Business risks: Increased equipment downtime. Additional costs to find and implement service support. Delayed deadlines for in-house projects.
Consequence for the purchasing department: Still obtain service from the supplier or find alternative options.
How to avoid: Include service and support requirements in the criteria for evaluating proposals from potential partners. Check vendors' reputation for providing service support through feedback from other customers.
Decent service support
7. Warranty limitations
Problem: Supplier offers limited warranty coverage or disclaims liability for product defects.
Business risks: Reputational damage to the company due to reduced product quality for its customers. Additional costs to repair or replace defective products, for example< of locks or handles. In B2B, replacing a single unit can mean replacing an entire batch. And that affects timelines.
Consequence for the purchasing department: Dispute resolution.
How to avoid: Include detailed warranty terms in the contract. Regularly monitor suppliers' compliance with these conditions.
Resolution of disputes
8. Limited opportunities for employee development
Problem: Constant focus on only the cheapest options limits development opportunities for procurement staff, as they are forced to focus solely on operational tasks.
Business risks: Reduced staff motivation. One of the reasons for staff turnover in the procurement department. Low efficiency of the team.
Consequence for the procurement department: Lack of opportunity to work on the tasks of in-depth analysis of the market, demand, suppliers. Lack of opportunity to improve performance.
How to avoid: Use automated tools to optimise operational processes. Shift the focus from searching for suppliers with minimum prices to searching for counterparties based on a set of criteria.
9. Inefficient use of resources
Problem: Prioritising the lowest price often leads to a lack of trust between partners, as issues of quality, delivery time, etc. arise time and time again. No trust means no foundation for long-term co-operation.
Risks for business: Increased costs of preparing and administering a large number of short-term contracts instead of working on long-term contracts with strategic suppliers. Distraction of administration and lawyers to resolve disputes with an unreliable supplier. Disruptions in logistics and warehouse operations.
Consequence for the procurement department: Constant search for new more reliable partners. Constant problem solving with unreliable suppliers. Lack of efficiency.
How to avoid: Conduct a comprehensive evaluation when selecting a supplier. Use an approach that identifies key partners for long-term co-operation. Spend major efforts to develop deeper relationships with them.
10. Risk of contract failure
Problem: Abnormally low prices may be a sign of unscrupulous bidders or an attempt at dumping. Such bids may lead to problems with the performance of the contract by the selected supplier.
Business risks: Disruption of the procuring company's own work schedule. Large financial and reputational costs.
Consequence for the procurement department: In such a situation, bidders need to be more thoroughly vetted and decisions on admission to tender need to be made.
How to avoid: Use electronic systems to automatically identify anomalous prices. Require B2B suppliers to provide detailed justification of their price bids.
Justification of price bids
11. Difficulties in inventory management
Problem: Selecting suppliers based on lowest price leads to inventory management difficulties due to late deliveries or quality changes in incoming shipments.
Business risks: Complicated planning of in-house production and logistics within the company. Disruptions in warehouse operations.
Consequence for the procurement department: Focus on controlling the inventory management process to minimise supply-related risks.
How to avoid: Implement inventory management automation systems to forecast requirements more accurately. Take a more thorough approach to incoming quality control. Plan deliveries with stock to offset delays. Always have a base of alternative suppliers in stock.
Careful receipt of products in the warehouse
Summary
Choosing a supplier only on the basis of the lowest price is like building a foundation on sand. At first glance it seems favourable, but at the right moment the structure may simply collapse. Attractive figures often hide late deliveries, unstable quality and a lack of support when you need it most. The result is not money saved, but deadlines missed, nerves and a damaged reputation.
It is not the lowest price that gives you confidence in the future, but a reliable partner who keeps his word, provides quality and does not leave you in a difficult situation. This is how we work with our clients!
Author: Andrey Alexeev
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