7 December 2021

Profitability Should Not Be a Negative Concept in Material Handling

Nobody benefits when profit is eliminated from the economic equation.

With the economy improving, many people in the material handling industry anticipate better times without having to make any adjustments to their business practices. Regrettably, this entails the continuation of one particular practice that contributed significantly to the economy’s downfall a few years ago.

When the “dot. coms” were soaring, they grew rapidly through the simple strategy of offering impossibly low costs and relentless expansion into markets they were unfamiliar with. They operated at a loss for years on end, promising investors that things would improve once they gained a sufficient percentage of the market. Naturally, this “lose a little on each deal but make it up in bulk” business model eventually backfired on them. One by one, the balloons popped, and the economy followed them down the tube.

This flawed business model is nonetheless prevalent in the material handling industry. Too many corporations have played the merger game, involving themselves in markets they are unfamiliar with. Too many have played the numbers game, shifting money from one pocket to another to maintain their appearance for another quarter (this is referred to as managing for stockholder value), completely ignoring long-range strategy.

Worse yet, far too many businesses have bought into the concept of foregoing earnings in order to gain market share, with the hope of regaining profitability after the competition is destroyed. It’s termed “buying a job,” which refers to submitting a bid with little or no profit margin. This offers two theoretical advantages. It secures you the job, which enhances the appearance of your sales figures (if not your earnings). More crucially, it prohibits your competition from receiving the job for some people.

However, let us consider the disadvantages. Without profits, there is no money for research & development, capital expenditures, or other business expenses. Your growth is only theoretical and will vanish as soon as you run out of money to purchase jobs.

With low-profit margins, you lack both the financial means and the motivation to service the transaction once it is completed. As a result, you’ll have a disgruntled customer, which is never good for your company’s long-term prospects.

Finally, suppose your technique of underbidding your competitors succeeds and your closest opponent declares bankruptcy. What occurs? Someone acquires his assets at a discount of 25 cents on the dollar and establishes a new firm. Due to his minimal initial investment, he may undercut your prices. You have not removed competition; rather, you have exacerbated it.

Profit is not an impure term. Nobody profits when profit is removed from the economic equation, least of all the client. I’m not saying we shouldn’t strive for efficiencies that will allow us to retain a respectable profit margin while keeping prices low. While lower prices benefit the customer, the economy as a whole and the material handling business, in particular, will be much healthier if we all admit to wanting our fair share. If you’re content with a 3% profit, I recommend purchasing a government bond. It is more secure.

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