Question

Catalog companies are committed to selling at the prices printed in their catalogs. If a catalog company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or as expected? If the company could change the price of sweaters, would it raise the price, lower the price, or keep the price the same? Given that the company cannot change the price of sweaters, consider the number of sweaters it orders each month from the company that makes its sweaters. If inventories become very high, will the catalog company increase, decrease, or keep orders the same? Given what the catalog company does with its orders, what is likely to happen to employment and output at the sweater manufacturer?

Short answer

Demand for sweaters was unexpectedly low. The catalog company is likely to lower future orders, affecting manufacturing output and employment.

Step-by-step solution

Analyze Inventory Levels

When a catalog company finds its inventory of sweaters rising, it indicates that the demand for sweaters is lower than expected. Inventory levels increase when the volume of unsold goods is higher, suggesting consumers are not purchasing at the rate forecasted by the company.

Evaluate Demand Expectations

Given the increase in inventory, the demand for sweaters was unexpectedly low. When demand does not meet expectations, it leads to an accumulation of products, as is evident here with the rising sweater inventory.

Assess Potential Pricing Strategy

If the company could change the prices, it would likely lower the price of sweaters to stimulate demand and to clear out the excess inventory. Lowering prices is a common strategy to increase sales when inventories are high.

Consider Ordering Decisions

Since the catalog company cannot change prices, it needs to adjust orders with the manufacturer. With high inventories, the company will decrease its future orders to balance the surplus before ordering more.

Impact on Employment and Output

As the catalog company decreases orders to manage high inventory levels, the sweater manufacturer will likely face a decrease in demand for production. This reduction in production needs may lead to lower output and potentially reduced employment levels in the manufacturer.

Key concepts

Demand Forecasting

Demand forecasting is like predicting the future sales of a product. It's a bit like weather forecasting, but for business needs. Companies rely on historical data, market trends, and consumer behavior to make educated guesses about how much of a product will be sold in an upcoming period.
For catalog companies, accurately forecasting demand is crucial. If they predict too high, they'll end up with unsold products, like the sweaters in our example. This means inventory rises because actual sales fell short of predictions.
On the other hand, if demand is higher than expected, they might run out of stock, which can also hurt business. Therefore, regularly updating demand forecasts helps in aligning supply with actual demand patterns. A good demand forecast helps maintain balanced inventory levels, reducing unnecessary costs and improving customer satisfaction.

Pricing Strategy

When talking about pricing strategy, we're referring to how a company sets the price of its products. This decision deeply influences a product's demand in the market. Prices can be adjusted based on various factors like inventory levels, market competition, and overall demand.
In our scenario, had the company been able to change the price of sweaters, it might have considered lowering prices to attract more buyers and clear out the excess inventory. Lower prices can increase demand because the product becomes more appealing to a broader range of customers looking for a bargain.
However, pricing is a delicate balance. If prices drop too low, it might hurt the company's profits or brand image. Therefore, companies often use promotions or limited-time offers to strategically influence demand while maintaining perceived value.

Supply Chain Management

Supply chain management encompasses the entire flow of goods from the manufacturer to the end consumer. For catalog companies, this involves coordinating with suppliers to ensure the right amount of products are produced and delivered on time to meet customer demand without overstocking.
A rise in sweater inventory suggests an imbalance somewhere along this chain. If a company cannot adjust pricing to stimulate demand, it often has to adjust the quantity of its future orders to prevent further inventory build-up. This chain reaction starts affecting manufacturers who face reduced orders.
Over time, decreased orders can lead to lesser production needs, which might impact employment at the manufacturing level. Prioritizing seamless supply chain coordination helps prevent such bottlenecks and ensures resources are used efficiently to meet fluctuating market demands without excessive surplus or shortages.