Is Demand Really in the Drivers Seat?

[Vllad]

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

[Vanraw]

I don't think supply is defining demand at a "product type" level but I agree it is defining demand at the specific supplier level. ie, Company XYZ sells nails. The demand for nails still drives supply. The difference is that XYC agreement with "Bob's Nails" defines the specific supplier. You demand / need nails, but your need will only be filled by Bob's nails (until XYZ changes vendors at the flip of a hat). The real question is why is XYC choising to fill demand with Bobs Nails? and not someone else.

This begs the question "the chicken and the egg".... Which is really the same question as Supply and demand.

I think that the reason for XYZ to come to an agreement with Bobs Nails (BN) is like you said, the direct shipping and inventory control makes BN the differentiators of the product. The reason that this is the only differentiator, is that of the 20 Nail manufactures, there is no difference in Quality or unit price. Since there is no difference in quality or price, then why carry 5 different brands. The only reason XYZ would carry more options then BN, is if some company came up with a better product that the public DEMANDED, or another company came in with a price point based on direct shipping that would beat BN.

So I think Demand still defines supply. Its just that the choices in many area's have become monogamous. There is little difference between products, there fore why not go with one. Especilly when your customers are not demanding alternative choices.

This plays into the service industry as well as manufacturing. Take my industry, telecommunications. In the the late 80's, after ATT divestiture, LD had huge differentiators in quality. This was because ATT owned the best / sometimes only microwave frequencies. Competitors were using Satellite with some Microwave. So the competitors drive demand by lowering cost of a poor quality product.

Fast forward to the mid 90's and all the competitors including ATT are now using Fiber. Analog is dead. There is zero difference in quality and services / features. The differentiators becomes a price point for delivery of the product and that's it.

I think this is a standard of product evolution. But make no mistake, Demand is still driving supply.

[OrsunVZ]

There is certainly some truth to all of this, but you need to step a litle further back from the arguement to see what is actually happening.

The odd thing is that by definition, demand HAS to be in the drivers seat, BUT companies can't control demand. They CAN however control supply, so they have been trying to manipulate or artificially create demand by controlling the supply. This will only last so long before another company crops up to challenge that thinking by providing a set of value additions that people WANT (demand =p).

So I guess in a more short term sense you could make the arguement that supply is in the drivers seat - thing is, supply still gave them the keys.

[Slamz]

Amazon.com?

Their 2008 revenue was $19 billion. It's a far cry from Wal-Mart but it's not far off from Sears.

I buy literally everything I can from Amazon. I live in the suburbs so it's not exactly inconvenient to go to Home Depot or Target (both are probably 2 miles from me) but Amazon has vast selection, includes 3rd party sellers and can deliver anything from toothpaste to televisions to my door. Plus since it's online I can read and post reviews of items and get an idea of if Joe's $5 box of nails (rated 2 stars) is really worth the savings over Bob's $9 box of nails (rated 5 stars).

I guess their model is basically "DC only". Rather than cut out the DC and ship straight to the store, they cut out the store and only have DCs, which then ship to customers directly via UPS. And the fact that they double as a front for 3rd party vendors means even if it's not technically carried by Amazon, I can still buy it from them with no difference in appearance (other than that 3rd party shippers have a separate shipping charge).


The only thing stopping Amazon is probably the simple ability to get packages to people.

What Amazon really needs is a shipping company that operates 24/7 and will allow customers to specify a window of delivery. Luckily, UPS will drop stuff off at my door and I live in a good neighborhood but I'm never, ever home when they deliver. If there was something like UPS that could deliver in the 6pm-11pm timeframe for the same price, Amazon would take off like a rocket.

[OrsunVZ]

Really all you're talking about is a shortening supply chain. Or more importanty how long does an item exist, after its been made, before it is owned by an end user. The better we are able to predict damand, the less we have to store in order to supply.

[Vllad]

This will only last so long before another company crops up to challenge that thinking by providing a set of value additions that people WANT (demand =p).

So I guess in a more short term sense you could make the arguement that supply is in the drivers seat - thing is, supply still gave them the keys.

The problem is with this retail "non DC" make up is it eliminates compitition and doesn't leave room for new idea's. A new company can't crop up with a new idea because their new idea will never see the market. You can create the greastest nail ever produced but if it does't hit the shelves you can't create demand for it.

Products contiually got better or cheaper over time in order to distiguish themselves from their competitors. This left room for an ever evolving door of producers. With choices the Demand choose who survived and who didn't.

Now days it is the suppliers who decides who lives and who dies. You have two nail companies that thrive, one that sells to Lowe's and one the sells to Home Depot. All others die because they can't get their nails to the public.

In other words short of someone plopping down 500 million to open a new Hardware chain to compete with Lowe's and Home Depot it is impossible for the public to create demand. All compitition is crushed. With out choice Demand can never drive the market.

To me that is the very definition of supply controlling demand.


Vllad

[Hoofhurr]

I think you are spot on Vllad. Similar arguments can be made for any high investment technology that's far removed from the end-user. I love how specific your example is. I definitely think that free markets develop towards predictable conclusions that are not in the best interest of the consumer or perhaps the overall health of an economy. The tendency for free markets to result in monopolies is one. The tendency for free markets to be short sighted and tied to annual returns is another. The tendency for free markets to put huge sums in the hands of relatively few people who for all intents and purposes aren't bound by laws and likely disconnected from your average person's ethics. Money does much more to control how policy develops than a ballot so it stands to reason that those with more money have more voting power. Those with more voting power have more influence over the way markets develop.

The free market is a powerful tool for an abundance of reasons but I question those that think it can answer all our problems and should be given free rein to do so.

[Dustie]

My two contributions to this thread are:
1. Supply and demand is alive and well. Everything you mentioned is simply factor involved in arriving at aggregate demand. (It all really comes back to supply and demand at a certain price level)
2. The US still does manufacture things. We still manufacture more then any other nation in the world (it's just not the percent of GDP that it once was).

Manufacturing, value added > current US$ (most recent) by country
Rank Countries Amount Date
# 1 United States: 1,545,400,000,000 $ 2004
# 2 Japan: 961,930,900,000 $ 2004
# 3 China: 748,078,800,000 $ 2005
# 4 Germany: 565,520,200,000 $ 2004
# 5 Italy: 291,326,600,000 $ 2005

Full data here for 2004:
http://www.nationmaster.com/graph/ind_ma...current-us

[Slamz]

Now days it is the suppliers who decides who lives and who dies. You have two nail companies that thrive, one that sells to Lowe's and one the sells to Home Depot. All others die because they can't get their nails to the public.

I'm not entirely convinced...

For example, if Joe's Nails, mass distributed via Home Depot, were substandard quality and made in Singapore, and Bob wants to make a nail company stamping out superior nails, I would think the real question is "Can Bob make a living" rather than "Can Bob compete with Joe".

I agree he can't compete with Joe. Home Depot isn't going to pick up Bob's product so Bob isn't going nationwide anytime soon. But if Bob can demonstrate the value of his nails to customers in a particular locale, he may be able to start up a small time company producing nails and selling them locally.

So maybe he can't come out of the gate competing with Joe and Home Depot, but he can still create a competitive product on a local level, IF local companies agree in the value of the thing.


I feel like I see the same thing in the grocery store all the time.

There's this great soda that's made with sugar rather than corn based sweeteners. They can't compete with Coke. They aren't going to be distributed by Wal-Mart. But they get local grocery stores to pick up their product. Maybe they aren't going to be the next Pepsi but they can make a living creating an alternative product so long as there are enough consumers who see it as worthwhile to buy their higher priced goods.

Same thing with "organic" milk, eggs and vegetables. They really can't compete with big producers and they cost more but they can get enough distribution and customers to apparently earn a living and keep making their product.

Or same thing with beer. You aren't going to topple Budweiser but you can probably open your own brewery and compete on a local level, especially if you can sell the idea that "buying locally produced beer is worth the extra dollar over the cost of a Budweiser".


The real question may be if there's enough of this local stuff going on to make any difference.

That is, there's no doubt that Joe's Nails is #1 nationwide and the next biggest competitor is small beans, but is Joe's Nails 99% of the market, dominating it entirely, or are they 65% of the market with Bob taking up 1% and another 34 small time local companies across the nation each taking up another 1% of their own? A small time local company isn't going to take anything away from Joe and Home Depot but 50 small time local companies can, if they can demonstrate the superiority of their product.

[Vanraw]

It comes down to one simple view. If people stop demanding goods, the supply chain stops. If people start going into a frenzy buying state, Supply chain goes nuts. Demand drives Supply no matter what the distribution method.

[Vllad]

My two contributions to this thread are:
1. Supply and demand is alive and well. Everything you mentioned is simply factor involved in arriving at aggregate demand. (It all really comes back to supply and demand at a certain price level)
2. The US still does manufacture things. We still manufacture more then any other nation in the world (it's just not the percent of GDP that it once was).

Manufacturing, value added > current US$ (most recent) by country
Rank Countries Amount Date
# 1 United States: 1,545,400,000,000 $ 2004
# 2 Japan: 961,930,900,000 $ 2004
# 3 China: 748,078,800,000 $ 2005
# 4 Germany: 565,520,200,000 $ 2004
# 5 Italy: 291,326,600,000 $ 2005

Full data here for 2004:
http://www.nationmaster.com/graph/ind_ma...current-us

The data above includes the manufacturing of raw goods. For purposes of this discussion manufacturing would be the assembly of finished goods that impact the market.

In other words cranking out wood to send to China to create furniture is still giving up supply control that used to exist 50 years ago.


Vllad

[Vllad]

It comes down to one simple view. If people stop demanding goods, the supply chain stops. If people start going into a frenzy buying state, Supply chain goes nuts. Demand drives Supply no matter what the distribution method.

Not if you have a monopoly. Granted we aren't talking about the absolutes of a true monopoly but with these new supply chains instead of being a 100% of a monopoly don't you just end up with 90% being monopolized?

Take your AT&T model. In the 60's everyone had a phone. It was serviced by one company. As kids grew up they bought phones for their homes as well. With new homes come new phones. Demand increased over time but Supply still controlled it.

People had great new phone idea's but their was no way to impliment them. AT&T controlled what went to market and what didn't.


Vllad

[Dustie]

My two contributions to this thread are:
1. Supply and demand is alive and well. Everything you mentioned is simply factor involved in arriving at aggregate demand. (It all really comes back to supply and demand at a certain price level)
2. The US still does manufacture things. We still manufacture more then any other nation in the world (it's just not the percent of GDP that it once was).

Manufacturing, value added > current US$ (most recent) by country
Rank Countries Amount Date
# 1 United States: 1,545,400,000,000 $ 2004
# 2 Japan: 961,930,900,000 $ 2004
# 3 China: 748,078,800,000 $ 2005
# 4 Germany: 565,520,200,000 $ 2004
# 5 Italy: 291,326,600,000 $ 2005

Full data here for 2004:
http://www.nationmaster.com/graph/ind_ma...current-us

The data above includes the manufacturing of raw goods. For purposes of this discussion manufacturing would be the assembly of finished goods that impact the market.

In other words cranking out wood to send to China to create furniture is still giving up supply control that used to exist 50 years ago.


Vllad

That makes the conversation pretty tough. Value added is the best measure since its the net value add of all points in the manufacturing processes. Also, I posted this to disprove the continual claim I see that the US doesn't manufacture anything anymore. Simply not true.

[Vllad]

That makes the conversation pretty tough. Value added is the best measure since its the net value add of all points in the manufacturing processes. Also, I posted this to disprove the continual claim I see that the US doesn't manufacture anything anymore. Simply not true.

How do you recommend trying to see the corialtion between value add and final products hitting the stores?


Vllad

[Dustie]

That makes the conversation pretty tough. Value added is the best measure since its the net value add of all points in the manufacturing processes. Also, I posted this to disprove the continual claim I see that the US doesn't manufacture anything anymore. Simply not true.

How do you recommend trying to see the corialtion between value add and final products hitting the stores?


Vllad

I don't want to do that because I think it leaves out a huge chunk of the manufacturing done in this or any country. Again, I posted this to disprove the continual claim I see that the US doesn't manufacture anything anymore. Simply not true.