'Value for money' trumps 'low cost' when assessing logistics partners

In one of his popular Discworld novels, author Terry Pratchett introduces the "boots" theory of economics. A rich man will spend $100 on a pair of boots, but because they're well made with quality leather, they will last him 10 or 15 years in perfect condition. A poor man can only afford $20 boots; cheaply made, they tend to wear through the sole within a year or two. Cardboard insoles can help them last another season, but they'll still leak. So in 15 years, the poor man spends $50 or $60 more than the rich man does on "cheap" boots - and most of that time, his feet are still wet. In effect, you get what you pay for.

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According to a Benchmark Research Report prepared by independent research specialists TerraNova in June 2013, South African businesses seeking CEP partners are familiar with this maxim. In a post-recession environment, cost-cutting has become an article of faith - but when asked what criteria they consider most important when evaluating CEPs, respondents in fields as diverse as mining, finance, pharmaceuticals and retail ranked "low cost" only seventh out of 13 attributes. Turnover of the companies surveyed ranged from less than R100m to more than R5bn per year, with 46% of them turning over R2bn at least.

Delivery on time, all the time, non-negotiable

The CEP market is growing rapidly, fuelled by online shopping and the number of companies, large or small, that have realised a specialist logistics partner can be more cost-effective than maintaining their own distribution infrastructure. As the global economy contracted, many retailers and manufacturers reduced storage costs by carrying less stock - a situation in which CEPs are well placed to service fluctuating demand. And despite the recession, African economic growth continues apace - all these factors increase the market for CEP services, whether business-to-business or business-to-client.

Given that CEPs are often used for the transporting of legal documents, chronic medications and other time-sensitive or strictly confidential packages, clients have certain non-negotiable expectations. The four most important attributes listed in the research were reliability, efficiency, accuracy of information and value for money. In other words, preferred CEPs need to be able to deliver in full, on time, to a wide range of destinations, while keeping clients informed regarding delivery status in real time, at a reasonable rate. The fact that "value for money" is listed as a need above "low cost" in seventh place emphasises the difference between the two.

This attitude is also apparent in the respondents' rankings of available CEP options. The two most used CEP firms, global giant DHL and SA/Africa-based SkyNet, were also adjudged the top two performers in reliability, efficiency and value for money, and in the top three for accuracy of data. Clients rate "value for money" much more important than cost - a conclusion borne out by the fact that the most used, most reliable SA-based CEP, SkyNet, also scores highest among the local brands in "value for money".

The implication is clear: companies seeking CEP partners need to weigh up pricing incentives against the non-negotiables: reliability, efficiency and accurate information and, in some cases, reach. A logistics partner that can offer low cost but not guarantee these attributes could turn out to be more expensive than one setting a value-for-money price and delivering quality service.