Edition 441- Stupid Corporate Decisions

One of our great clients is in the retail space, specialising in health care. They’re a niche business and the owners not only have incredible knowledge of the industry, the products and their clientele, but are also passionate about it.

In one of our recent meetings, we discussed the stupid corporate decisions undertaken by two of their key suppliers, that will, potentially, adversely impact their business.

In the first instance, a product from their key supplier, is manufactured by a third party out of Thailand. It appears the US based corporate parent has made a strategic decision to only sell products they manufacture themselves, in future. There’s no rhyme nor reason for this sudden change of product strategy, though part of me does wonder if it is tied to the current US Presidential Election campaign, where one candidate has suggested they’ll be turning up the wick on tariffs in relation to imports arriving into the USA, should they be elected.

The point about this decision is that the product in question is the largest seller in their portfolio. Not the portfolio of my client, but that of the US based, multi billion dollar company. Already, the third party manufacturer is talking to other potential partners to manufacture a similar product. Of course, there will be legal agreements to overcome, but it appears this corporate decision, out of the US, makes no sense. If a company you were a shareholder in said they were going to “bin” their largest selling product, wouldn’t you question the wisdom of the individuals making that decision?

In the second situation, a separate wholesale supplier keeps changing a key product in their portfolio. This product is also manufactured overseas. In the past year, the wholesaler has changed, at least twice, the supplier for this product. The consequence of this decision – there is a requirement for the wholesaler to stock spare parts for each of these products, for seven years, to honour their obligations under consumer legislation. How much does that cost the wholesaler in terms of the amount of stock they have to retain in their warehouse? What does that mean in terms of the amount of cash that is tied up in that stock, and thus not available for other purposes? How complicated does it make their whole inventory process?

In my experience, these stupid decisions by large corporates are driven by any number of reasons, including:

1. Too much focus on spreadsheets.
2. Individuals that have no skin in the game, making key financial decisions.
3. Running a business purely toward driving the share price up, not how the business can be made sustainable in the long term.
4. Management operating inside their bubble, and not getting right down to ground level, where their product is in the hands of the people that need it – or sell it.

It will be interesting to see how this pans out in the next 12 months to two years. There will be an impact for my client. However, they’re so nimble, they’re already looking to source replacement products from alternate suppliers. They’re driven by making sure their clients, who have come to depend on them stocking these products, are not let down and, in the process, have a sustainable, profitable, long term future. 

This Week’s Tip

“When you focus on delivering results, profits will follow, if you’re doing it right.
If you focus on making profit, you might find you’re not delivering results.”