Featured image: mh.xbhd.org/Flickr CC BY 2.0
Customers who treat their relationships with their suppliers of the goods and services as limited to the individual transaction may overlook something that is of much more value than they realize
Markets are instrumental to our health, wealth and wellbeing. They enable the expression of demand to be passed on to prospective suppliers, and allow the goods or services demanded to reach the customers willing to pay for them. Take a look around you wherever you are, and you will see numerous objects that someone (depending on where you are, that might be you yourself) had a need for, and someone else has supplied through the market. It’s little short of magic. But that near magic can fool us, if we are not careful.
Markets are brilliant
Trading and bartering have been around for thousands of years, likely for longer than records stretch. But we have Adam Smith to thank for, if not being the first person to describe the essence of trade, then certainly being the first person to capture it in the immortal words, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.” We take our money to the butcher, the brewer or the baker, and in return we receive meat, beer or bread – and both they and we are better off. When many suppliers and many more customers can find each other in a market, the whole process of concluding transactions becomes easier still. This is, in part, because markets come with the concept of a market price, the amount paid for a good or service that ensures that the quantity of the good or service produced precisely matches the quantity demanded.
In Adam Smith’s time customers and suppliers often had some form of relationship beyond an anonymous purchase transaction: the same customers regularly bought goods from the same local butcher, brewer and baker, and likely socialized with them outside the shops too.
These days we have access to dozens and dozens of sellers who can offer us not just meat, beer and bread, but also washing up liquid, T-shirts, lipstick, tyres, mattresses and thousands more goods. We can ‘go to market’ at any time of the day or night (literally), and have our expectations met that, whatever it is we desire, there will be several suppliers willing to conclude a transaction at a price that is right for both of us. Our relationship with any of them rarely goes beyond that one single transaction because – well, why would it? The market delivers not just goods and services, it delivers abundance. Whenever we need something, the market can supply. Almost everything has become a commodity, available any time, any place.
Almost.
Unfortunately, the ubiquitous efficiency of the market for just about everything we need has led us to sometimes ignore that little word, and to assume that, to all intent and purpose, what is needed is always abundantly available. And this is not always so.
The value of security
Many countries have been affected by a shortage in drugs to treat ADHD, in part due to rising demand, but also as a result of “manufacturing issues” according to the UK’s National Health Service. Henry Shelford, co-founder of the charity ADHD UK, said last Monday in a consumer programme on BBC radio that the supplier of the drug in question (Takeda) has only a single factory outside North America to supply the rest of the world, located in Ireland, where there has been a catastrophic failure. According to an earlier Sky News report, it appears that there is no second source to supply the UK’s demand.
What used to be abundantly available suddenly no longer is. Abundance is relative: when we can get what we need whenever we need it, we experience abundance. But that may well be because the supply matches exactly the demand – not because there are ample suppliers. When, in a market, a supplier experiences problems, there are usually plenty of others who can step in. Abundance in a market means resilience. But when the apparent abundance is the result of a single supplier steadily meeting a steady demand, that resilience is not there. When the supply is disrupted, the abundance turns out to be a mirage.
A different example of abruptly vanishing abundance occurred last Tuesday evening at the UK’s border control posts, when the 270 electronic passport gates at 15 airports and international railway stations went out of action. These e-gates can handle incoming passengers much more efficiently than the old system in which an agent manually checked every individual’s passport. But in the old system, there was, in effect, a resilient market place at work with multiple suppliers (of labour) – the individual border control agents. At peak moments, more of them could be deployed, and if sickness prevented some of them from turning up, qualified staff could be brought in from other duties to increase capacity if needed. An event whereby all agents – all the suppliers in the market – would be out of action at the same time was exceedingly unlikely. But the gates act like a single supplier, and an event in which their apparently abundant capacity for handling huge numbers of travellers suddenly and completely disappears is clearly not so improbable.
In both cases, it is technically perfectly possible to make contingency arrangements to add resilience. In the extreme, the supplier of ADHD drugs could add a second, independent production line next door and thus vastly reduce the risk of a major disruption in supply. The UK border control service could likewise set up a parallel, independent system. More cost-effective solutions probably exist, but they require thinking beyond the transactional.
In a market, transactional relationships work fine because resilience, and hence security of supply, is inherent and self-evident. Much of what we buy is provided by markets where, thanks to competition, the prices are low. But we might forget that the resilience that is effectively included for free in the low prices of a market is not automatic when there is no market with an abundance of suppliers.
If security of supply represents a significant part of the value of a purchase, that value is not accurately reflected in the market price, but in how bad it would be if the supply was disrupted. Richard III, in Shakespeare’s eponymous play, probably possessed a stable full of horses that had cost what was for him barely more than some pocket money. But when he lost his horse in the heat of the battle, the true value he put to one was no less than his entire kingdom.
When there is no abundant market ready to provide resilience, a transactional relationship with a supplier is not sufficient. Ensuring resilience requires a more profound relationship between customer and supplier, like a well-oiled machine, reflecting the fact that what the customer buys is not just product, but security of supply.
Koenfucius 