Tuesday, October 7, 2008

Supply Meets Demand: Market Clears

For those of us still interested in microeconomics, there's an interesting story in today's issue of The Wall Street Journal.

The story is about the challenge facing Home Depot CEO Frank Blake shortly after he took the reins in 2007. While visiting a store in Arizona, he found they had a surplus of lawnmowers. And while visiting another store on the west coast, he noticed they were short on popular power tools. The problem was all stores carried the same inventory, almost regardless of what sold in the specific location.

The solution for Home Depot, as it has been for other large retailers mentioned in the story, has been to localize the selection of merchandise while still taking advantage of the volume-based pricing available to large chains. Essentially, HD used data to determine which items in a large centralized inventory, will do best at each store. Match supply to demand.

With fewer unsold items, overall costs drop and prices can be lowered while still maintaining profitability. It's a good story and a good example.

I look forward to your comments.


Catherine Lillard said...

It seems to me that it would be common sense to stock a store with what would sell best in that area depending on its needs, however I suppose larger corporate companies such as Home Depot and Wal-Mart might have thought carrying everything was better until they realized how much they were losing by overstocking on unnecessary items. The cost of conducting market research would undoubtedly set the company back, but much less than way overstocking on items that wouldn't sell would. If the demand for a product simply isn't there, there's no reason to supply the product.

Mike Fladlien said...

why did HD just change the prices to clear the market? lower prices for lawnmowers and higher prices for power tools. the function of prices is to ration goods.

Tim Schilling said...

According to the article, it wasn't that there was insufficient demand, overall. Rather it was a case of mismatched demand. In the example from Arizona - there weren't enough lawns to justify the supply of lawnmowers allotted to that particular store. They could cut the price, but it would probably have to go much lower than HD's cost. Better to allocate the mowers to another store that may need them.

Demand wasn't insufficient - just mismatched.