The Vending Machine Demand Model (c)

Have you ever wondered about how small things that we do on a daily basis can impact the supply chain of products?

Here is an interesting example for you:

Often times when I forget to bring lunch from home, I run to the vending machine down the hall to grab something quick. To my dismay, a majority of the items in the machine are things that I don’t really want! But, since I am pressed for time and I cannot drive to the retailer down the road – I end up buying something that “I may be OK with”. Let’s call this – “Product A”.

Think about how that affects the replenishment of the products in the vending machine. The owner of the machine sees that as an increased demand for "Product A". The consequence is that you continue to see more of that product in the future!

Can we assume that the Vending Machine is an approximate representation of the larger retail environment? Is it safe to say that if we are faced with certain limitations (in this example - time and/or money), and we had to chose between products - we will most likely buy something "that we may be OK with"? Are the numbers of options available today to the consumer playing an important role leading to this dilemma - both for the retailers (what product to stock) and the consumers (what product to buy)? Is it feasible to determine the true demand of a product if a possible “substitute” to that product exists?

As a retailer/manufacturer how would you Tackle this Challenge OR Maximize your Opportunity? I will post my thoughts in the next update.

Feel free to post comments below. I look forward to hearing from you.

Until my next post!

Best regards,
-AS

(The Vending Machine Picture shown above is courtesy of Matsuda Yukihiro.)

Comments

  1. Reinald WolffAugust 25, 2009 at 11:20 AM

    Hello Anupam,

    I find your everydayslife approach to the critical issue of good forecasting very inspiring and easy to follow!
    Publishing a blog on supply chain management myself: www.scm-blog.de, I wonder if we can just link our sites. The only downside for your readers may be that I write in German ...
    Good luck with your blog!!
    Best regards,
    Reinald Wolff, Germany

    ReplyDelete
  2. Kevin LewisDecember 8, 2009 at 9:09 AM

    Vending machine as an approximation of a large retail environment? Come on, let's be real :)

    I recently had the opportunity to work with Canteen Vending, the largest vending retailer in the country. There are clearly some similarities to a retail environment with concepts such as placement and adjacencies. There are also fundemental inventory management issues such as capacity constraints. Working with some data, I found some interesting results in terms of customer response. Those machines in commercial environments such as textile plants and manufacturing plants tended to mostly sell lower priced product (perhaps maximizing calories/dollar?). Those machines in schools and hospitals tended to sell more volume of the higher-priced products (perhaps vending products are seen as convenience goods?). So, are vending machines a good approximation of how customers shop? Maybe. It's hard to tell.

    The largest issue I see with vending machines as a representation of a large retail environment is that vending customers tend to be a captured audience. Price points are low and so there is little financial investment in the purchase. So, phenomena such as substitution and cannibalization are virtually non-existant. Also, it is hard to simulate and measure traditional retail consepts such as halo effects where loss-leader products drive customer volume and attachment rates of other items in the "basket" drive margins. Each purchase is an individual transaction, so the concept of market basket is invalidated. Which products in a vending machine should never be out of stock? Which prducts should have increased facings? What flexibility exists to move Lifesavers and gum to positions other than the bottom racks?

    So, in summary, I do think there may be some similar aspects to a large retail environment. But, there are so many unique constraints and opportunities that exist for the vending machines that it is a difficult analogy.

    ReplyDelete

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