Unveiling Hidden Costs: Rethinking Procurement and Sourcing Decisions with Tony Hines

Unlock the secrets to smarter sourcing with Tony Hines on the Chain Reaction Podcast, as we unravel the iceberg theory of costs in procurement. Ever wondered how hidden costs like travel, relationship management, and quality control can sink your bottom line? Tony, with his extensive research background in the UK fashion industry, reveals how these unseen expenses often outweigh the initial savings of low unit prices. Prepare to shift your focus from merely hitting sales targets to embracing a more comprehensive understanding of procurement costs, ensuring your decisions are truly value-driven.

As we contrast the benefits of UK suppliers against overseas options, Tony helps us appreciate the intangible perks of sourcing locally, like reliability and seamless communication. Discover why opting for the cheapest option might not always be the smartest move, and how recognizing hidden costs can influence economic policies and everyday purchasing decisions. Join us in advocating for a more thoughtful approach to sourcing that emphasizes long-term value over short-term savings. Get ready to challenge conventional wisdom and transform your procurement strategy with insights that could redefine your sourcing choices.

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Chapters

• 0:01 Hidden Costs in Sourcing Decisions
• 2:52 Linda and Ray Discuss Hines' Iceberg Theory
• 9:41 The Value of Sourcing Decisions

Transcript

Tony: 0:01

Hello, you're listening to the Chain Reaction Podcast, all about supply chain advantage. I'm Tony Hines, and thanks for dropping along today. Great episode coming your way in just a few moments. Stick around, stay tuned, find out more.

Tony: 0:46

Well, in the 1990s I was doing work with a number of retail organizations. That led me to think more deeply about Sourcing Decisions by UK Fashion Retailers and it was published in the Journal of the Textile Institute number 93, volume 3 again on the 30th of March 2009. I also presented early findings from the research to the Drapers Record Conference in Bloomberg in the city in 1999, where a number of CEOs and retail organisations, including buyers, were present at the conference, and it was taken up also by the apparel industry group at the time, headed by Ken Watson, who incorporated the findings from the research into the training programs which were pushed out by the Apparel Industry Association. So it gained some significant traction. And since then, of course, ideas don't leave you. They stay with you and they're worked on and they're developed. And of course, I've written my supply chain strategy book since then, which incorporates the ideas of the iceberg into the way in which sourcing and procurement decisions are taken and the difference between value and cost.

Tony: 2:15

I came across the discussion that you're about to hear, and the topic of the iceberg was picked up and discussed and I'm sure you'll find it quite interesting. I certainly did. It reminded me of the work I'd done. The thing about the iceberg theory is it still holds good after 25 years. It's a theory that I could still recommend and find useful to make those smarter decisions. Listen to the discussion about the research which I came across, so I hope you enjoy the episode and find out something perhaps you didn't know and something that's useful for you.

Linda: 2:59

Hey everyone, welcome back for another deep dive. Today we're going to be talking about something called the iceberg theory of costs. It's this really interesting idea that can totally change how you think about like buying decisions, whether it's for you know a company or even just everyday stuff you buy. So we've got a research paper here in an interview with a guy who came up with this whole theory. His name is Tony Hines and he was studying the UK fashion industry back in the 90s and, trust me, what he found out about all these like hidden costs is pretty amazing.

Ray: 3:30

Yeah, it really changes the way we usually think about cost and value.

Linda: 3:32

Exactly so. Hines was researching how UK fashion retailers decide, you know, where to make their clothes Like. Should they manufacture everything here in the UK or go overseas? Back then everyone just assumed that the goal was, you know, to find the absolute cheapest supplier possible.

Ray: 3:47

Right, that was like the common wisdom back then. But Hines found out that it's not that simple. Focusing only on that initial price tag, you know it often leads to decisions that can actually hurt the business later on.

Linda: 3:59

Okay, so walk me through this. How are buying decisions usually made? Like what were they looking at?

Ray: 4:04

Well, the main focus was on something called the bought in price. Basically, it's the unit price of, like you know, a shirt or a dress, plus the cost of getting it from the factory to the retailer's warehouse.

Linda: 4:14

So, like I'm guessing, labor costs were a big factor in all of this. I mean, wages in places like India are way lower than here in the UK, so overseas manufacturing probably seemed like the obvious choice, if you wanted to save money.

Ray: 4:27

Yeah, exactly, and that's where that whole iceberg analogy comes in. That initial price comparison it's really just the tip of the iceberg. There's this whole other mass of hidden costs lurking below the surface, you know, and those costs can totally change what looks like a good deal at first glance.

Linda: 4:42

This is where it gets interesting. So what are some of these hidden costs that people might be missing?

Ray: 4:46

So Heinz actually made this really cool diagram. You can see what he calls the perceived saving gap above the waterline. That's based only on the bought-in price, like we talked about. But below the waterline there's this huge junk of hidden costs, all associated with sourcing products overseas, for example. Think about all the time and money buyers spend traveling to visit those factories. You know these factories could be on the other side of the world.

Linda: 5:10

Oh right, Flights, hotels, meals, Plus they have to be away from their families and all their other work. That all adds up really fast.

Ray: 5:17

For sure. And it's not just the travel. There's managing those relationships, you know, troubleshooting problems, dealing with time zones and language barriers. And then there's the risk of delays, which can lead to lost sales, especially if you miss out on, like a fashion trend, or if you don't have enough stock when people want to buy it. That's a cost that's hard to like, put an exact number on, but it can be a huge EE deal.

Linda: 5:38

So you might think you're saving money at first by going overseas, but then all these hidden costs pop up and wipe out those savings and even cost you more.

Ray: 5:47

Exactly. And then on top of that you've got costs related to quality control. What happens when a shipment shows up and the clothes are like defective or they just don't meet the retailer's standards? That creates a whole new set of problems reworking those clothes, rejecting them, handling returns and it can even damage the retailer's reputation if they end up selling like bad quality stuff.

Linda: 6:08

It's like a domino effect One problem leads to another and the costs just keep piling up.

Ray: 6:13

You got it, and a lot of times those costs are absorbed by the retailer without them even realizing it. It's easy to focus on that initial price tag and miss the bigger picture.

Linda: 6:22

OK, so we're seeing all these hidden costs can really add up. But why are they so often ignored? Are buyers just not aware of them, or something?

Ray: 6:29

Well, Hines found that it has to do with the pressure buyers face. They're constantly being judged on whether they can meet their sales targets and, you know, keep their jobs If they can get the lowest bought-in price. They look good, at least for the short term, even if it's not the best choice for the company.

Linda: 6:44

So it's like they're focusing on their individual performance rather than the long-term health of the company. I guess it's easier to just point to that low initial price than to try and figure out all those potential hidden costs.

Ray: 6:56

Exactly, and Hines' research goes beyond just the theory. He actually talked to real buyers and got their perspective. He quotes one buyer who basically said my job is to get the right price point and if I hit my targets, my job is safe. That really shows how individual goals can sometimes clash with what's best for the company overall.

Linda: 7:13

It's like that classic short-sighted decision making You're trying to protect yourself, even if it means potentially hurting the company later on.

Ray: 7:20

Yeah, and Hines' also has this story about the crazy travel demands on these buyers. Some of them were on the road for months at a time just visiting factories, which meant tons of money spent on flights, hotels, meals, and not to mention the toll it took on their personal lives. Hines even mentions burnout and relationship problems because of all the travel.

Linda: 7:38

Wow, that really puts things in perspective. It's not just about the money. There's a human cost to all of this too. I remember another example from the research. A UK supplier was talking about having to fix all these problems with overseas factories. Basically, they were taking on all the risk and expense just to keep the retailer happy, even though it wasn't really their responsibility.

Ray: 7:56

Right. And then there's the problem of trying to measure how much money is lost because of delays. It's not always easy to figure out, but it can have a huge impact on the bottom line.

Linda: 8:04

It seems like there are a lot of potential downsides to focusing only on that initial price tag. But before we move on, I'm curious what if retailers really started understanding all these hidden costs? Wouldn't that be a good thing for UK suppliers?

Ray: 8:17

You're definitely on to something there. By understanding those hidden costs, uk suppliers could actually have a real advantage. They could highlight the benefits they offer that often get overlooked when people are just comparing prices, the benefits they offer that often get overlooked when people are just comparing prices.

Linda: 8:29

So instead of just competing on price, they could focus on things like speed and reliability and being easier to work with.

Ray: 8:35

Exactly, and that's what we'll pick up in the next part of our deep dive. We'll explore those advantages in more detail and look at how UK suppliers can actually use the iceberg theory to their benefit. Ok, so let's dive into how understanding these hidden costs can actually help UK suppliers.

Linda: 8:53

Okay, so we're kind of shifting gears now. Looking at things from the perspective of UK manufacturers, what advantages do they have, you know, compared to those overseas suppliers?

Ray: 9:02

Well, like we were talking about before, speed and responsiveness are super important. Uk suppliers can deliver stuff way faster because they're closer to the market and they can react to changes in demand much quicker than someone overseas.

Linda: 9:13

Yeah, that makes sense. No need to worry about those long shipping times or, you know, global supply chain issues and all that.

Ray: 9:18

Exactly, and that kind of flexibility can be a big deal in fashion.

Linda: 9:21

Right, because fashion is all about keeping up with the latest trends.

Ray: 9:24

Right. If a retailer suddenly needs to restock a popular item, a UK supplier can increase production and get those clothes on the shelves much faster.

Linda: 9:32

So they're not just selling a product, they're offering peace of mind and the ability to take advantage of those sudden changes in demand.

Ray: 9:40

Yeah, exactly. And then there's the whole quality control thing. We talked about the problems retailers face when they get a shipment from overseas and it's full of defects. It's not just about the money. It can really hurt their reputation if they end up selling stuff that's not good quality.

Linda: 9:54

Right, you don't want to be known for having inconsistent quality.

Ray: 9:57

Exactly, and this is where UK suppliers can really stand out. They can work more closely with retailers, build those relationships and have more control over the whole manufacturing process. So that means more consistent quality and fewer surprises for the retailer.

Linda: 10:11

So it's about trust, you know, showing that you're a reliable partner.

Ray: 10:14

Absolutely. Hines also talks about how important good communication and collaboration are between retailers and suppliers, and it's just easier to do that when you're dealing with someone in the same country, speaking the same language, working within the same culture, you know.

Linda: 10:28

It seems so obvious when you say it like that, but I guess it's easy to forget about those things when you're so focused on just the price.

Ray: 10:35

Yeah, for sure, and those strong relationships can make the whole supply chain run more smoothly and efficiently. There's more trust, more open communication and people are more willing to work together to solve problems.

Linda: 10:47

So it seems like UK suppliers have a lot to offer, but how do they actually use this iceberg theory to their advantage? How do they convince retailers to look beyond that initial price difference and see the value they bring?

Ray: 10:59

That's the big question. It's about changing the conversation from price to value. Instead of just saying, hey, we're cheaper, UK suppliers need to show the real benefits they offer.

Linda: 11:07

So like put a number on those hidden costs that retailers might be paying by going overseas, show them how much they could save on travel expenses or by having fewer quality control problems.

Ray: 11:21

Exactly. And don't forget about those less tangible benefits too, things like peace of mind, knowing they're working with a reliable partner, being able to respond quickly to changes in the market, and the value of having those strong relationships and open communication.

Linda: 11:32

So it's about presenting the whole picture, you know, not just focusing on that one number at the bottom of the invoice.

Ray: 11:38

Exactly. It's a smarter way to sell, but it's one that can really pay off in the long run. And Hines even suggests going a step further. He thinks UK suppliers should actually work with retailers on research projects to really dig into these hidden costs and figure out exactly what they are.

Linda: 11:53

So, instead of just talking about it, they could actually collect data and you put some real numbers behind it.

Ray: 11:58

Right, Hines was really into this idea of quantifying the iceberg for specific types of products. Imagine being able to track all the costs associated with sourcing a particular garment, following it all the way from the factory to the store.

Linda: 12:12

It'd be like a detective investigation into the true cost of a piece of clothing, and that data could be really useful, not just for retailers and suppliers, but for policymakers too.

Ray: 12:20

Yeah, exactly, it could help the government create policies to support UK manufacturing and make UK suppliers more competitive globally.

Linda: 12:27

So it's not just about individual businesses. It affects the whole economy.

Ray: 12:31

Right, and this brings us back to how relevant the iceberg theory really is. It's not just about fashion or manufacturing. It applies to any buying decision, whether it's a company buying materials or just, you know, someone, choosing between two brands of coffee at the supermarket.

Linda: 12:45

Yeah, I can see how it applies to so many everyday decisions, but it's kind of overwhelming to think about calculating all those hidden costs for every single purchase I make.

Ray: 12:53

Oh, I know what you mean, but it's not about getting stuck overthinking every little thing. It's more about being aware of the iceberg theory and using it as a way to think more carefully about the choices we make.

Linda: 13:04

So it's like a tool, a way to approach decisions with a more, you know complete perspective.

Ray: 13:10

Exactly. Instead of just automatically going for the cheapest option, take a second and ask yourself what am I missing here? What are the risks?

Linda: 13:19

Those are some good questions to keep in mind, but there's another side to this right. The iceberg theory isn't just about avoiding those hidden costs. It's also about recognizing the value of things that might not have an obvious price tag.

Ray: 13:31

Definitely Think about speed, responsiveness, quality, reliability, strong relationships. Those things might not show up on a spreadsheet, but they can make a big difference in how satisfied you are with your purchase.

Linda: 13:41

So it's about looking beyond the surface and understanding the real value of the choices we make.

Ray: 13:46

That's a really powerful idea. This has been so interesting. I feel like I'm seeing everything differently now, like through iceberg colored glasses or something. It's amazing how this theory started in fashion, but it can be used for so many things, you know. It really makes you stop and think about those decisions we make every day, you know, those ones that seem so simple at first.

Linda: 14:04

It just shows how powerful it can be to really observe and ask the right questions. Tony Hines, he didn't just accept what everyone was saying about sourcing decisions, he dug deeper and what he found has really changed how we think about cost and value, you know, for like decades. And it's not just about business either, right.

Ray: 14:20

No, not at all. The iceberg theory is something that can help us figure out this world that's getting more and more complex all the time. It encourages us to look beyond what we see on the surface, to think about the long-term consequences of the choices we make and to really appreciate the value of things that might not have a clear price tag.

Linda: 14:38

Yeah, it's like that, saying sometimes the cheapest option ends up being the most expensive in the long run. This theory really proves that.

Ray: 14:44

It definitely does. It gives us the power to make better decisions, more thoughtful decisions, whether we're buying a car, hiring a contractor or even just choosing which coffee to buy.

Linda: 14:54

So, as we wrap up this deep dive into the iceberg theory of costs, what's the one thing you want our listeners to remember?

Ray: 15:00

I think it's to just take a moment before you make a decision, Instead of just going with the hype or the lowest price. Stop and ask yourself what am I?

Linda: 15:09

not seeing here what are the hidden costs or risks? It's about slowing down, thinking things through and considering the whole picture Exactly.

Ray: 15:14

Yeah, and remember, the iceberg theory isn't just about avoiding hidden costs. It's also about recognizing and valuing things like speed, quality, reliability and those good relationships you build.

Linda: 15:24

Those things might not have a dollar value attached to them, but they can have a huge impact on how satisfied you are in the long run.

Ray: 15:30

Absolutely. It's about understanding what truly matters to us and making choices that are aligned with our values and long-term goals.

Linda: 15:38

And with that I have one last question for our listeners. Think back to something you bought recently maybe a gadget, a piece of furniture, even a service. Now ask yourself what hidden costs did you maybe miss, and how might knowing about those costs have changed your decision? I think that's the question that can lead to some real eye-opening moments.

Ray: 15:56

Definitely. The Iceberg Theory is a tool that can help us all make smarter decisions, decisions based on value, in every part of our lives. So keep exploring, keep asking questions and keep diving deeper.

Linda: 16:06

That's great advice. This has been another fantastic deep dive. Until next time, happy exploring.

Tony: 16:19

Well, I hope you've learned something from the discussion. I hope you've enjoyed the discussion and I hope it's been of relevance for anybody working in procurement and in supply chains. I'm sure they would find it useful. I know it was a central focus for me in my research for a number of years and it's still important today. And, of course, it relates very much to the total cost of ownership concept, which I was also very interested in. At the same time, I looked at the iceberg, because the cost of ownership is in the iceberg, isn't it? The bit under the water as well as the bit on top? Chain Reaction If you like the Chain Reaction podcast, then you can join me each week by subscribing to the Chain Reaction Podcast and you'll be first to know when new episodes come along. So until next time, I'm Tony Hines. Have a great week and I'll see you in the next Chain Reaction Podcast.

Linda: 17:14

Bye for now you've been listening to the chain reaction podcast written, presented and produced by tony hines.