07-24-2009, 09:28 AM
Since Orsun brought it up I thought I would expand that topic on the current state of Demand in the US Market.
While no doubt demand still drives the eventual sales I am not sure that the old models for Supply and Demand still work with the way Supply chains are set up for today.
Primarily because demand is no longer in control of deciding what the purchased products are.
For example most major retailers (Lowe's, Home Depot, Wal-Mart, Big-5, Profits, SAK's, Fred's, Loomis, Target) work with a non DC "single product" direct supply chain process.
Sear's and JC Penny's work with in the old DC model. (this model is struggling in today's world)
Old DC Model:
ABC company keeps inventory in regional DC's (Distribution Centers) so when their store's run out of goods they shipped from the DC direct to the store. This way ABC company can get freight to store's over night and never not have product on the shelf. To stay with in over night distance that usually requires 6 DC's if ABC company is a national retailer. By using a DC ABC company can keep even obscure items in inventory so they can satisfy every customer. Including mail/email order fullfillment.
By using DC's this also means they can ship things cheaply in bulk and don't have to worry about lag times with manufacturers and carriers. The problem with DC's is they are extremely expensive to keep up and running.
Non DC Model:
XYZ company ships everything directly to the store from the manufacturer. They don't maintain any inventories regionally. This means they are moving goods as fast as they can from manufacturer to store not in bulk. They skip the DC's since the increased shipping cost are cheaper then the DC cost. This relies on two factors.
1. The store has to be able to maintain a slight inventory (hence why you see pallets hanging over the shelves. Plus have a very well organized supply chain in order to get goods quickly to their stores.
2. You have to reduce your product offerings.
Reduced product offerings are the key component:
XYZ company in the 1970's used to carry 6 kinds of nails in their store. That means maintaining a supply chain with 6 different manufacturers. That is to expensive and complicated to distribute to your stores with out DC's. In order to dump the DC's you need to simplify your supply chain.
XYZ company goes to the nail manufacturers and says we will carry only one nail company in our store. We want you nail manufacturers to bid on it. Who ever comes back with the cheapest nail we will sign a 5 year contract with. "Joe's" nails who made quality nails since 1908 can't afford to lose XYZ company as a retailer so not only do they have to start making their nails in Thailand instead of the US they started putting a little tin in their nail plus skimping on quality control in order to reduce cost by 20%.
In the end XYZ company still carries nails but now they only carry Joe's nails. This way XYZ company only has one manufacturer per item they chose to carry in their stores. This means they can remove the DC's and ship everything direct to the stores. This also means they reduced over all cost in order to reduce the end cost to the customer. Everyone wins (that is if you don't care about the reduced quality of the merchandise you purchase)
The only problem with this set up is if you like Bob's nails over Joe's nails you can't get them at XYZ company. You have to go to ABC company for those. However he is so much more expensive because he still uses a DC operation it is an acceptable loss.
Summary:
In order to bring a cheaper product and reduce cost retail stores over all no longer carry product lines based upon the demand for said products. It really doesn't matter anymore if people would rather buy Bob's nails. In the end people will buy Joe's nails because it is convienant and they pay less.
Demand isn't in control any longer short of the need to use a nail.
I would put to you that Supply is now in control of dictating what the consumer will purchase. The day's of keeping supply on hand to meet consumer needs are over. For retailers still following that model the expense of doing so makes them so uncompetitive that they either have to move over to the same business model of XYZ company or they have to keep reducing in size. This is bad for stock prices and bad for CEO's trying to keep their jobs.
Because we no longer manufacture goods in the US price can't be controlled. This leaves consumers with two types of retialers. Mom and Pop and the Wal-Marts of the world.
Because of these cost restrictions "Demand" will buy what they have available and like it. The days of "Demand" deversifying the market are over.
Vllad
While no doubt demand still drives the eventual sales I am not sure that the old models for Supply and Demand still work with the way Supply chains are set up for today.
Primarily because demand is no longer in control of deciding what the purchased products are.
For example most major retailers (Lowe's, Home Depot, Wal-Mart, Big-5, Profits, SAK's, Fred's, Loomis, Target) work with a non DC "single product" direct supply chain process.
Sear's and JC Penny's work with in the old DC model. (this model is struggling in today's world)
Old DC Model:
ABC company keeps inventory in regional DC's (Distribution Centers) so when their store's run out of goods they shipped from the DC direct to the store. This way ABC company can get freight to store's over night and never not have product on the shelf. To stay with in over night distance that usually requires 6 DC's if ABC company is a national retailer. By using a DC ABC company can keep even obscure items in inventory so they can satisfy every customer. Including mail/email order fullfillment.
By using DC's this also means they can ship things cheaply in bulk and don't have to worry about lag times with manufacturers and carriers. The problem with DC's is they are extremely expensive to keep up and running.
Non DC Model:
XYZ company ships everything directly to the store from the manufacturer. They don't maintain any inventories regionally. This means they are moving goods as fast as they can from manufacturer to store not in bulk. They skip the DC's since the increased shipping cost are cheaper then the DC cost. This relies on two factors.
1. The store has to be able to maintain a slight inventory (hence why you see pallets hanging over the shelves. Plus have a very well organized supply chain in order to get goods quickly to their stores.
2. You have to reduce your product offerings.
Reduced product offerings are the key component:
XYZ company in the 1970's used to carry 6 kinds of nails in their store. That means maintaining a supply chain with 6 different manufacturers. That is to expensive and complicated to distribute to your stores with out DC's. In order to dump the DC's you need to simplify your supply chain.
XYZ company goes to the nail manufacturers and says we will carry only one nail company in our store. We want you nail manufacturers to bid on it. Who ever comes back with the cheapest nail we will sign a 5 year contract with. "Joe's" nails who made quality nails since 1908 can't afford to lose XYZ company as a retailer so not only do they have to start making their nails in Thailand instead of the US they started putting a little tin in their nail plus skimping on quality control in order to reduce cost by 20%.
In the end XYZ company still carries nails but now they only carry Joe's nails. This way XYZ company only has one manufacturer per item they chose to carry in their stores. This means they can remove the DC's and ship everything direct to the stores. This also means they reduced over all cost in order to reduce the end cost to the customer. Everyone wins (that is if you don't care about the reduced quality of the merchandise you purchase)
The only problem with this set up is if you like Bob's nails over Joe's nails you can't get them at XYZ company. You have to go to ABC company for those. However he is so much more expensive because he still uses a DC operation it is an acceptable loss.
Summary:
In order to bring a cheaper product and reduce cost retail stores over all no longer carry product lines based upon the demand for said products. It really doesn't matter anymore if people would rather buy Bob's nails. In the end people will buy Joe's nails because it is convienant and they pay less.
Demand isn't in control any longer short of the need to use a nail.
I would put to you that Supply is now in control of dictating what the consumer will purchase. The day's of keeping supply on hand to meet consumer needs are over. For retailers still following that model the expense of doing so makes them so uncompetitive that they either have to move over to the same business model of XYZ company or they have to keep reducing in size. This is bad for stock prices and bad for CEO's trying to keep their jobs.
Because we no longer manufacture goods in the US price can't be controlled. This leaves consumers with two types of retialers. Mom and Pop and the Wal-Marts of the world.
Because of these cost restrictions "Demand" will buy what they have available and like it. The days of "Demand" deversifying the market are over.
Vllad