Saturday, October 20, 2012

Watch out for get-rich-quick schemes

 Good profitability comes from making the right-buying decision

HAVE you bought any gold in the last five years? If you had bought, either you are laughing all the way to the bank or you are worried sick that you might never see your life savings back in your bank account.

If you had bought physical gold because you believe the price of gold will go up, then you have made a great investment decision. If you had bought because there is a high income return in the form of interest or share of profits, then you have let greed cloud your buying decision. You are buying for all the wrong reasons.

Other than buying shares in the stock market based upon reliable insider information, I know of no other buying opportunities that guarantees you high returns in a short period of time. You might argue that corruption is a guaranteed clean profit scheme but then it is not a buying decision where personal financial risk is involved. It is always other people's money.

The only common denominator in any get rich scheme is greed. Lots of human greed preyed upon by conmen who will continue to thrive because of gullible people buying for the wrong reasons. Their belief that “there is a greedy sucker born every minute” is justified.

In business, you are hailed a marketing wizard when you sell well. If you had bought well, it will be reflected in your gross margins, cash flow and bottom line. So who should be rewarded more, seller or buyer?

Most businesses are obsessed with selling decisions and place less emphasis on buying decisions. You will find these businesses having higher cost of goods, higher obsolescence, poor cash flow and weaker profits.

In this era of commoditisation where final prices for similar products in the market tend to level out, the buying decision becomes even more important and crucial if you intend to eke out any ounce of strategic advantage over your competition. Buying accurately products that sells, negotiating for the lowest prices, buying the right quantity to prevent inventory overstocking, improving cash flow and in this process creating operational efficiency that will help you survive the battle and eventually win the war.

Even the biggest organisations make poor buying decisions. One great example is Tenaga Nasional Bhd's (TNB) buying deal with the original independent power producers. Granted that the buying decision was right in view of the energy crisis at that time, the one-sided negotiated deal to buy at high prices and all the power produced, caused massive amount of losses to TNB. Just to show how one major buying decision can change the fortunes of a company.

In contrast, AirAsia's early decision to buy massive numbers of new aircraft of one type and from one supplier has defined their success path that you are seeing today. New planes versus old leased planes reduces maintenance costs and are more fuel efficient. Reduced training required for flying and cabin crew. Familiarity breeds efficiency.

Planes can be rerouted anywhere and replacement easily available as there are same numbered seats in all the planes. Expensive spare parts are kept to a minimum and maintenance procedures easily standardised. AirAsia, being the single largest customer of Airbus Industries, will definitely pay the lowest price for an A320 aircraft with the best financing terms from European banks.

These buying decisions are driven by the low cost business model plan. The only buying decision beyond its control is the supposedly high charges of operating out of the new LCC airport. Protracted negotiation between the only authorised airport operator and its biggest customer who will win?

To make money when you sell at a lower price than your competitors, you must have a comparable lower operating cost and lower cost of goods. Selling price is now determined by your buying cost.

So if you want to go into a price war, just make sure you can continuously buy cheaper than your competitors and your operating cost kept even lower. The best example is Walmart, the biggest retailer in the world. Using its massive buying power to have the lowest cost of goods, it has out-priced its competitors by a margin across all categories. To ensure it has the lowest operating cost, it has deliberately built its low-cost warehouse buildings on low-cost land in the outskirts where labour is easily available and cheap.

Buy cheap, sell cheap. Forever cheap. Proven successful formula when products and services become commoditised. Just make sure your buying strategy is sustainable.

I have been trading for 27 years and I have lost count on how many wrong buying decisions that I had made. Some were really inexcusable silly mistakes, some were downright poor judgement calls and some out of pure greed. In all these cases, I was not focused enough and was buying for all the wrong reasons and it had caused me considerable amount of discomfort and agonising moments in my business life.

I have a successful brand because I developed a great buying strategy that is able to meet my customers' needs on a sustainable basis. I have a profitable company because I bought well and because I am personally involved in all the major buying negotiations.

If you are on your own, be fully involved in the buying process. What you buy determines what you sell and how you sell. How you buy determines your profitability.

Just remember not to buy pieces of paper that promises you immediate high returns. For your children's sake... Wise up!

ON YOUR OWN
By TAN THIAM HOCK

To access earlier articles of On Your Own, log on to www.thiamhock.com. Honest comments welcomed and approved.

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