36 – Costs of uncertain supply

15 October, 2019

Grain Expectations – Volume 1: You open the door into your favourite bookshop and see the first instalment of a series you’ve been waiting for. You hand over a $50 note (for the hard cover edition naturally) and leave, book in hand. Later that night, you happen to see a copy of the exact same book available for only $30 on Newzbookz.com – an unfamiliar, recently established online store with a less-than-polished web interface littered with typos and spelling mistakes.  The online store indicates that delivery will usually take 10-25 days.

You are pleased with your decision.

Grain Expectations – Volume 2: Twelve months later, when the next instalment is released, you return to your local bookshop only to find that they have already sold out. However, as you are a long-term customer, they offer to have a copy sent overnight from an interstate branch for only $15 extra.  You thank the assistant and indicate that you would like to “think about it first”. You, return home and decide to again check out Newzbookz.com. The website now looks a little more professional, with many of the typos fixed and they have the book available to order for $35 (including delivery, which apparently now takes only 5-6 days).  You decide that a few days’ delay isn’t worth paying nearly double, so, after spending 30 minutes or so entering your details and setting yourself up as a customer, you take a deep breath and click “Committ to buY” [sic].  As promised, five days later you receive your book in the mail and, despite looking a little worse for wear after its journey half way around the world, everything is still legible, so a few rips and folds are barely noticeable.

You are pleased with your decision.

Grain Expectations – Volume 3: Twelve months later, the third and final instalment of the series is released. You check Newzbookz.com, which now features a polished customer interface and delivery that has been shortened to three days.  While the price has crept up to $40 (delivered), you are already set up as a customer, so only need to click “Commit to Buy” (also fixed).  Importantly, the previous volume arrived as promised, and since that time they have introduced rugged packaging to prevent damage in transit, which makes the transaction feel less risky the second time around. 

Where do you buy Volume 3?

Markets in south-east Asia generally like using Australian wheat for making noodles. The wheat provides noodles with good colour characteristics, the Australian traders are trustworthy, the shipping time is relatively short, and the market is familiar with how to use the wheat. The markets have been willing to pay a little more for the known characteristics, and discount grain from other origins with quality or counterparty risk.

However, when challenging seasonal conditions limit the availability of Australian wheat for the export market, customers who have historically relied on Australian grain must look elsewhere. They still need the wheat to mill into flour to make the noodles that much of their population relies on as a major part of their daily diet. Effectively, this means that disruptions to Australia’s ability to supply export markets forces customers to establish, and then rely on, commercial relationships with our competitors (thus reducing perceived risk), while simultaneously becoming better acquainted with the functional and processing characteristics of wheat from competing origins. Even when Australian wheat again becomes available, its position in the minds of customers remains irrevocably changed.

Additionally, the adoption of wheat from competing origins can necessitate additional costs such as staff training and labelling changes, along with changes to procurement strategy and establishment of new commercial relationships with suppliers. Where Australian wheat might have enjoyed complete ownership of a particular end-use, there is now much more origin optionality baked into each mill’s procurement activities. In the past, end-users had two options – they could get the ‘book’ today or, if unavailable, pay a little extra to get the book tomorrow.  However, the emergence of alternative options has introduced a comparative process that seeks to put a dollar figure on the mills’ important criteria.  In fact, depending on the market and the duration of any gap in availability of Australian wheat, there could even be resistance to reverting back. The staff may need to be retrained, or the mills might need to be recalibrated and so on. This means that Australian wheat’s former hegemony has been replaced by a new reality where it must demonstrate superiority over alternative options in order to receive that all-important purchase order. Understanding Newzbookz’s relative value proposition and its evolution over time is now undeniably important.

Over the course of buying each volume of Grain Expectations, the biggest single step change occurs the moment that the first book from Newzbookz arrives in the post unscathed (relatively at least).

“This risk has a dollar value – the effects of which are seen everywhere in our daily life. As perceived risk gradually erodes, the way the decisions are framed also changes.”

Historically, in addition to comparing relative quality, buyers looked at the price of Australian wheat relative to the perceived risk (both commercial and quality) associated with buying from a cheaper origin. As perceived risks decline, and ultimately approach parity, the comparison eventually becomes one of relative functionality or other non-risk related criteria.  Obviously, this means that promotional efforts and collaborative work with end-users must clearly establish why Australian wheat commands a price premium and why it represents the optimal commercial choice despite a potentially larger initial outlay.  However, importantly, whenever an end-user buys higher quality, more expensive wheat, they need to have a realistic pathway for recouping this cost back from the market.

It could be argued that the abovementioned example of the ‘bricks & mortar’ bookstore facing the emergence of a new type of competitor is analogous to the situation facing Australian wheat exports due to the emergence of low cost competing origins such as Black Sea countries and Argentina.  Both examples call for a re-examination of the established player’s value proposition and understanding how it has shifted as the new competitor emerges as a viable competitor.  For each, the key questions are –

  • What do buyers want and what is the relative importance of these wants?
  • Of these wants, for which ones do our competitors hold a natural advantage and vice versa
  • How can we use this understanding to leverage our strengths and mitigate risks in order to meet this competitive challenge?

Fortunately, the final chapter of this particular story has yet to be written…

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