Two quick updates on earlier posts. The first is on the impact Indian labor strife on manufacturing. I posted about that a few weeks ago. Today’s Wall Street Journal has an article that discusses how labor unrest has impacted a number of firms (Deadly Labor Wars Hinder India’s Rise, Nov 20). It makes a number of points, including that many factory workers haven’t seen much benefit from the rapid growth in the Indian economy over the last decade or so. It also notes that India’s labor laws have been lagging the development of the economy.
“We can’t be a capitalist country that has socialist labor laws,” says Jayant Davar, president of the Automotive Component Manufacturers Association of India.
The other update relates to rationing products. NPR had a story this morning on Call of Duty: Modern Warfare 2, a video game that has set a new record for sales in its first week (‘Call of Duty: Modern Warfare 2′ Breaks Record, November 20). One the points mentioned in the article is that the game’s publisher ActiVision intimated to retailers that it just might not be able to make enough copies of the game and that retailers should therefore get their orders in early. That then led to a big push to land customer pre-orders from from Amazon and Wal-Mart. This drives home what I have said before (here and here) that allocation schemes are an underappreciated part of the market mix.
While I am not familiar with allocation schemes, it is not that unsual for some companies to use a dynamic pricing scheme to shift customer demand from something that is not available to something that IS available, i.e. Kelloogs (or the retailers) could have run special promotions for other products in addition to rationing their Eggos. Dell did so in 1999, when an earthquake hit Taiwan, disrupting Dell’s supplies, which prompted Dell to offer free or low-cost “upgrades” using components from other suppliers, instead of not satisfying customer demand for the component that could not be delivered. Rationing is one way, but my fear is that such a strategy will only lead to stockpiling by retailers and customers, just to be on the safe side, which can only worsen the already dire supply situation.
I agree that dynamic pricing is an option — particularly when we are talking about the retail market. Allocation schemes are relevant in business-to-business settings. This is especially true when the supply chains consist of firms with a long histories of working together (e.g., Toyota and its dealers or Kellogg and the major supermarket chains). In such settings, suppliers are often reluctant to monkey with their pricing structures because it affects the relative value of the offerings in their product line. That may not be something you want to mess with when you have a (hopefully) temporary supply problem. For example, some years ago, P&G had a temporary blip in their capacity for making liquid detergent. This affected their premium brand (Tide) as well as their more budget oriented brands. Their solution was to maintain Tide production but put Era allocation. Pretty clearly, the answer is not raise the wholesale price on Era since that disrupts the whole positioning of the product line.