Avoid Over Buying During Demand Bubbles
By Jon Schreibfeder
Events will often spur spikes in demand for certain products. To avoid stockouts and disappointing customers, there is a tendency among buyers to purchase a large quantity of these items whenever they are available. Indeed, the CEO of a major food supplier was quoted in the Wall Street Journal Logistics Report on May 21st as saying “We’re trying to buy as much high-volume inventory as we think we can sell.”
This appears to be a logical statement. But the key to making this a good business decision is having a good prediction of what you will sell or use in the future. That is, an accurate demand forecast. In the same issue of the report, there is an article entitled “America is Awash in Hand Sanitizer”. At the beginning of the COVID pandemic, there were shortages of this product along with an insatiable demand from consumers. Companies bought all the hand sanitizer they could find, regardless of brand, in the belief that consumption would continue to grow over an indefinite period of time. Existing vendors of the product increased their production capacity while new suppliers entered the market. But, as with all demand “bubbles” throughout history, after a while demand fell off. Many retailers and distributors today find themselves with large quantities of excess stock that must be significantly discounted or liquidated.
It is inevitable that demand bubbles will occur again due to supply shortages and temporary spikes in demand. How can you avoid being stuck with excess stock?
- Think carefully before you order a large quantity of a product whose demand is spiking due to an event (such as COVID-19). Don’t react; think about the situation. Monitor several sources of information regarding the predicted duration of the event.
- of the product. For example, if a product has a 90- day shelf life, limit your purchase to no more than a 45-day supply.
- Avoid purchasing “off brands” of popular products that are currently in short supply. This inventory will be hard to sell when the popular item is available again. If you must buy “no-name” alternatives, limit your purchase to no more than a couple of month’s supply.
- During any instance of short supply, allocate your limited stock to your best customers. They will probably remember that you remained a reliable supplier during challenging times.
Throughout history, every demand “bubble” has burst. And supply has gradually adjusted to meet demand. Remember that unless you are selling fine wine or antiques, your inventory will probably depreciate with age. Don’t make rash purchasing decisions!