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Management article
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Reference no. ICR072E
Published by: International Commerce Institute
Published in: "International Commerce Review", 2007

Abstract

Retailers adopting ''hi-lo'' promotional strategies - deeply discounting a product for one period and then selling it at full price for the next - tend to create feast and famine ordering patterns for their suppliers. This wouldn''t be a problem for suppliers if one retailer''s promotion of a particular product always took place when another retailer was selling it at full price. Then, one retailer''s ''feast'' would cancel out the other retailer''s ''famine'' leading to relative stability and predictability. But often the feasts and famines take place at the same time. In these situations, manufacturers may find that during one period they have significant excess capacity, while during another period they simply cannot make enough. To smooth these peaks and troughs, manufacturers feel compelled to keep high stock levels in warehouses - thereby adding extra costs. Yet, even with these warehouses, promoting retailers'' demands for a particular product sometimes exceeds current stock levels. In this situation, by meeting the orders of one retailer, the manufacturer is effectively penalising another retailer. Very often, the retailer causing the biggest supply problems may end up getting the best service, while others suffer out-of-stocks. How should manufacturers tackle these knotty dilemmas?

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Abstract

Retailers adopting ''hi-lo'' promotional strategies - deeply discounting a product for one period and then selling it at full price for the next - tend to create feast and famine ordering patterns for their suppliers. This wouldn''t be a problem for suppliers if one retailer''s promotion of a particular product always took place when another retailer was selling it at full price. Then, one retailer''s ''feast'' would cancel out the other retailer''s ''famine'' leading to relative stability and predictability. But often the feasts and famines take place at the same time. In these situations, manufacturers may find that during one period they have significant excess capacity, while during another period they simply cannot make enough. To smooth these peaks and troughs, manufacturers feel compelled to keep high stock levels in warehouses - thereby adding extra costs. Yet, even with these warehouses, promoting retailers'' demands for a particular product sometimes exceeds current stock levels. In this situation, by meeting the orders of one retailer, the manufacturer is effectively penalising another retailer. Very often, the retailer causing the biggest supply problems may end up getting the best service, while others suffer out-of-stocks. How should manufacturers tackle these knotty dilemmas?

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