From the global pandemic of COVID-19 and its immediate consequences to natural disasters such as droughts, natural disasters and devastating floods, the world has experienced an increase in disasters in recent years. Other unexpected events include the Ukraine-Russia war, the US/Australia-China trade war as well as other events such as attacks, civil unrest and natural disasters that have all shaken the economy in a high or low worldwide.
Whether natural or man-made, natural disasters can suddenly disrupt supply, increase demand (or both) and many goods can become suddenly scarce, including water, gasoline, toilet paper, meat, toys, chlorine and toy computers (just to name a few). Such events directly affect production and supply – such as the recent shortage of lettuce in Australia due to floods or the increase in the price of coffee beans due to drought in Brazil, the world has many coffee producers. Disasters can also have a domino effect on supply chains. Toyota, for example, is currently facing a major shortage in semiconductors due to the impact of disease in factories, and this – together with the increased demand for consumer electronics – has led the company Car manufacturers provide significant reductions in profits due to affordability. to keep up with demand, with production cut by up to 40 percent.
How companies manage supply shortages
Such things often surprise companies involved in the production and delivery of goods, according to Dr Jihwan Moon, Senior Lecturer in the School of Marketing at the UNSW Business School. “For the past two years, shops have suffered from shortages caused by various reasons including the COVID-19 epidemic, floods, Brexit, etc.,” said Moon, who noted companies used different methods to help manage the shortage.
Some plans are relatively easy to implement. For example, firms may raise prices to reduce demand or only sell products on a first-come, first-served basis. come first Other strategies are more complex, such as pulling scarce products from the market to reduce demand. Companies can also limit sales to priority groups such as loyal customers, first responders and return orders, but Moon said that another (less popular) option is to combine supplies using a lottery-like system.
From the above guidelines – and with the success of seeing the past two-plus years – the purchase price is shown to be a popular tool for managing shortages, according to Moon, who recently wrote a research paper on the topic: The Profitability of Stock Markets in Times of Depression.
“It seems that the enforcement of purchase restrictions is a very useful tool,” he noted. “During the COVID-19 pandemic, many retail chains implemented sales restrictions on limited items such as meat cuts, paper towels, hand sanitizers, face masks, disinfectant wipes, liquid medications, disposable gloves then, take a shower with alcohol. In addition, we can easily see gas stations that limit the sale of fuel when it is not enough. Although many stores have used sales restrictions, it is not clear how and when stores should use sales restrictions with price changes.
Uncertainty and lack of supplies
While the shortage is a common problem for stores, Moon said it is very difficult for managers to find a good solution – mainly for two reasons. “First, it’s very difficult to expect a failure. Usually, the unexpected causes the shortage. For example, diseases can close factories or disrupt distribution,” he said, giving the example of a crisis disrupting the supply chain and suddenly reducing the list of cleaning products and bacteria or food.
“Secondly, simply increasing research is not a solution for an emergency, because taking more research is prohibitively expensive and increases the risk of a reduction in demand caused by closure emergencies, bans, bad weather, regulations, new products, etc.,” he said. For example, demand for hay drops during hurricanes, while demand for groceries (and goods like luggage and clothing) drops during pandemics like COVID-19.
“Too much research can be as problematic as not enough research. This means that it is difficult to develop an optimal research policy that is well managed by the failure or low demand,” explained Moon.
It is a special way of managing the deficiency
In managing product shortages, the research paper found that retailers tend to focus on profits as they try to attract customers. When there were natural disasters like typhoons, for example, Moon said that stores were charged dangerously. “To prevent this, some states have made a law to buy prices. This means that fair and just concerns are not enough to induce companies to sacrifice their profits and make a special way,” he said.
More selfless and altruistic ways can allow stores to accomplish shared goals and improve customer experience. However, specific methods can also cause frustration because, Moon explained, accuracy is often relative. For example, if a store imposes sales restrictions to improve stock distribution, it may cause customer dissatisfaction. buyers are first in line, because there may be more demand and more effort is made to source and buy available supplies. “So, disappointment can be replaced by goodness,” he said.
“Maybe some people think that kindness will bring more income in the future,” he added. However, it is not very clear, because customers cannot reward some stores in the future support (reducing spending on others) because it may require the use of different shopping behavior after the failure enough.
In addition, special methods include the importance of control, reinforcement and opportunity costs. For example, in the days before the typhoon, Moon said that gasoline is used less by not limiting the sales to quickly sell the available fuel oil and close it at the beginning of the week, so that the officers and employees to prepare for the storm.
How to manage product failure during future crises
In the research paper, Moon and his co-authors developed a model that retailers can use to their advantage to effectively use sales restrictions and adjust prices during times of shortage. The model uses a linear model, with recommendations based on the number of stores and the risk of failure.
As for the small size, which means that companies can save research without shopping, Dr Moon said that large supermarkets and large shopping bags should use low prices to increase the current trade. and provide restrictions in order to increase future transactions. At the other end of the scale, small stores with low customer traffic (and associated profits) must set high prices without restrictions because they do not need sales to keep records (and only reducing sales at higher prices). For example, during a meat shortage, large supermarkets such as Coles and Woolworths can stop selling meat products without any price. hate the prices. In contrast, small butcher shops can raise prices without sales restrictions.
For the shortage, which makes it impossible for companies to save products without sales, Dr Moon said that supermarkets should use low prices to take advantage of the limited supply of scarce products in order to can increase the trade of the current people because the trade profits reduce the minimum income. “It’s inevitable to be limited to low prices, so legal price restrictions are unnecessary,” he said. “In contrast, small stores should use higher prices to enjoy higher profits but create limits to increase future transactions.”
Another key finding of the research paper is that even if companies focus on profits when it comes to setting sales limits, Moon says that sales limits can improve both profits and customer satisfaction because The sales force can lead large companies, which may want to increase the number of customers. trade, to keep prices down. For example, in times of shortage, when Coles offers sales without a price increase, customers can buy the scarce product at a lower price because, without sales promotions , Coles would have increased the price. In addition, Coles will enjoy higher profits because the sales restrictions combined with lower prices will increase current and future store traffic, which will increase profits. from non-priced goods.
“In the case of shortages, without restrictions, stores may raise prices to save data while enjoying higher profits. In the severe shortages that occur during periods of demand, current sales limits allow stores to save data and subsequently reduce prices to increase transactions at a higher time in the future,” he said. concludes the research paper.
This article is reprinted with permission from UNSW BusinessThink, the knowledge base of the University of New South Wales Business School. You can find the first article here.