x Abu Dhabi, UAESunday 23 July 2017

Cost cuts can cause us to pay a far higher price

There's ample scope, in my view, for a combination of the well-made item that's more expensive and will stand the test of time, and the cheap that won't last so long, but meets a particular short-term need.

When I want a new pair of shoes for everyday wear, I usually go to the clothes section of a supermarket. There's a host of bargains to be found, not just in shoes but trousers, shirts and more. They don't cost a lot and, in general, they don't last long either. If the shoes last a few months, and they rarely survive for more, I still reckon they're worth their Dh30, even if my wife would prefer that I bought something a little better.

When I recently needed a pair of walking boots suitable for the desert and mountains, though, I chose differently. I searched for a pair that looked as though they had been made to last. I rejected many that seemed too expensive - or too cheap - and waited until I eventually found what I wanted. I broke them in on Jebel Hafit a fortnight ago and very satisfactory they are, too. When I want quality, I'm prepared to pay for it, or to wait and go without. There's ample scope, in my view, for a combination of the well-made item that's more expensive and will stand the test of time, and the cheap that won't last so long, but meets a particular short-term need.

That's fine for a pair of shoes, but one should, I feel, take a different approach in deciding on the purchase of other items. Sadly, many companies today appear to base their purchasing decisions almost wholly on price, without taking quality into account. If, by accepting the lowest offer, the product or service they receive is of lower quality, this often appears to be almost irrelevant, even if it causes subsequent problems.

A large company with which I am familiar recently had to award a contract for the supply of products and services. The usual list of potential suppliers was drawn up and they were invited to bid. Those responsible for assessing the bids then set about their task and eventually decided on the winner. They did so without consulting with the end-users in the company and were unaware that one of the bidders, which had won a similar contract several years ago, had caused considerable problems.

Moreover, their approach to occupational health and safety left much to be desired, and was almost certainly in breach of the HSE rules of the company. Indeed, the contractor's performance during that previous contract had been so poor that they were actually excluded from the approved bidders list on a subsequent occasion. Not so this time - the firm concerned was invited to bid and was eventually awarded the contract. Was a low price the reason?

As it happens, this particular contract doesn't involve anything that impinges on the core business of the company awarding it. Nor is it relevant in terms of service to the public. The box of cost reduction has been satisfactorily ticked while the end users who have to deal with the successful bidder will just have to cope, once again, with the poor quality and considerable additional work-related stress.

In some cases, of course, demands for cost reduction can threaten core business endanger to public safety; for example, buying reconditioned tyres rather than new ones for a vehicle that transports members of the public, or skimping on the amount of re-bar steel in a new building. Another example might be a property company that has sold as-yet unbuilt apartments on the basis of a particular quality of fixtures and fittings and then finds that its profit margins are under threat or, worse, have disappeared altogether. So they might cut back on the quality of the fixtures and fittings, saving some dirhams here and there. That might gain them profit, but only at the expense of the buyers who are, to put it bluntly, being cheated.

I hasten to add that these examples are purely notional - I have no particular company in mind - though there's certainly plenty of talk in the marketplace of such practices.

Such savings though may well turn out in the long run to have been false economies. Cheap tyres that can lead to accidents can cause not only deaths and injuries but the requirement for compensation payments, quite apart from a loss of customer confidence and, hence, business. Offering purchasers of apartments a lower grade of fixtures and fittings than they had been promised can lead to court cases, too.

Higher up the scale, awarding a major contract to a firm which offers a low price can be risky as well. Of course there's then a danger they're going to cut corners, with a consequent impact on quality. Moreover, if their margins are too low, there's a danger they won't actually be able to deliver all that they've promised. It's much more expensive to dispense with their services when they go bankrupt and to start again, perhaps from scratch.

I'm all in favour of cost control, particularly in difficult economic times. The ADNOC Group, for example, has saved hundreds of millions of dollars by insisting on the re-negotiation of contracts after the cost of steel slumped. That's excellent - and all credit to the negotiators who obtained savings without compromising on quality.

A single-minded pursuit of low costs at the expense of quality, though, is far too often a false economy. It's fine if you're buying a pair of shoes for casual wear, but it's not so wise if it goes much beyond that. It can cost a lot more than it saves a little way down the road.

 

Peter Hellyer is a writer and consultant specialising in the UAE's history, heritage and environment. A resident of Abu Dhabi for over 30 years, he has also written extensively on the country's social, political and economic development