Surplus stock has always been a problem for retailers and their suppliers. Nobody yet knows how to forecast what the consumer will buy next season. If we knew how to forecast accurately, nobody would have end of season discounts or factory outlets. Surpluses are, today, a fact of life for almost any distributor or retailer. How much of a season’s purchase do retailers have to discount? 30%? 50%?
Wouldn’t it be nice to have only about 10% left that needs to be discounted? To do that a retailer must not buy what the customer is not going to buy. Why can’t we do that?
There are already enough product shortages in stores, so causing more of that is not the solution to reduce discounting. Retailers don’t know the extent of the damage shortages cause. Some products sell out quickly – and these are celebrated as great successes. But retailers often forget to count the missed sales. If a product sells out after 2-months of a 6-month season, how much more of that product could the retailer have sold? Could he have sold twice as much, three times, or even more? What is the damage of missed sales? Remember, the entire margin of every missed sale disappears from the retailer’s bottom line!
Wouldn’t it be nice to never miss a sale, or at least cut missed sales by half or more?
Let’s build a simple model. The retailer buys 20 products at the beginning of the season for the whole season. He does not know how much the demand for each product will be, so he buys 100k of each. As luck would have it 6 products are ‘dogs’ – only 30% of the volume is sold at full price. 8 products are OK – 78% of are sold at full price. The remaining 6 are sold out in 2.5 months – implying that the retailer could have sold 140k more of each of these products (but he had only 100k).
Modeling the situation results in the sales curves described in the chart to the left. Every retailer will have a somewhat different picture – depending on his ability to replenish during the season and the popularity of his products. In my chart the RED line declines more or less continuously as popular items disappear from the shelves. They start to disappear in week 9 (there may be some residual sales). From then on the next most popular item disappears in the following week until only those products are left that will supply the season’s end discount sales! The bigger the gap, the greater the damage of missed sales and the greater the potential if the retailer can eliminate or reduce shortages. At least in my picture the potential is enormous. Lets see how much this could be worth.
