Economic Fallacy?

Trying to find a name of this concept to look up additional information to try and solve a work related product handling problem.

As an example:
You run a chain bookstores. You know on average what has sold per year of any given book title.

To properly stock your stores you decide to stock double your projected annual sales so if you normally sell 5 a year you stock 10 to account for any little good sales on a title. This way even if you do sell 5 in 3 months you have some time to order more.

A big boss type has come to the brilliant conclusion that to try and drive revenues you should :rolleyes: stock more copies of every item.

Since Item X sells 5 copies a year having 20 or 30 copies on hand does not increase sales it just increases the volume of product On hand.

You can certainly apply math and logic to optimize this problem. I have no experience with books, but the basic tradeoff to optimize is:

How much does it cost to a lose a sale?
How much does it cost to carry a book on the shelf (or warehouse, backroom, whatever) that doesn’t sell?

Of course, you will also need to know your projected lead time (from placing an order for more, until it arrives in the store).

Try searching for “just-in-time” inventory management, which is the concept to which you refer. Generally, you will optimize your profit if you DO NOT carry more inventory than you actually need (frees up capital for other purposes).

Well if you have all 20 or 30 copies on the shelves they will have more visibility and therefore more likely to be seen, picked up, bought, etc…

Yeah, KidCharlemagne is on the right track here.

I’m not sure if books would work this way, but it is very often true that a big pile of something will sell better than a small pile.

Think about the supermarket soda displays. Soda companies are always fighting each other for shelf space and display space, since it’s been pretty well established in that indistry that more bottles on the shelf = more sales.

There is probably some logic going on in the consumers head along the lines of: “wow, they had to stock so many of that thing it must be popular, I’d better get mine now before they’re all gone.”

Like an old manager of mine once said. “Eye-appeal” is “Sell-appeal”. I hated that saying.

Also, just-in-time inventory management is most often found in manufacturing, not retail.

How are these two paragraphs different? Do you mean that the boss, instead of doubling the expected sales, quadruples them?

What exactly is the problem you are asking? What is the optimal amount of stock to have on hand?

I agree with this, but if stocking several books over the expected sales crowds out a title might sell better, then keeping a high inventory is more costly than the expected sales. In other words, the opportunity cost of stocking more books of a certain title is the best alternative book that could be stocked in it’s place, ceteris paribus, of course.

I gave the bookstore chain as an example…for what we do (building book fairs) is more like remanufacturing.

No the fallacy is:
20 copies on display = X sales.
40 copies on display = X *2 sales.

Problem is we can easily supply every store/fair with double projected sales in product. Quadruple just creates more product in float for little if any benefit and we end up not being to present the product to all customers because many got double stocked above projections.

We are only selling 40-60% on average of what is presented so far. Why send 10 extra copies when only 5 of the ten sold to start with.

We are a weird business so many “typical” models don’t fit us well. We are a hybrid of retail and remanufacturing. We pretty much have the problems of both with only a few of the bennies.

I think the point you may be missing is that while you are probably right in your “equation” it is not correct either to say:

20 copies on display = X sales
40 copies on display = X sales

As the first reply pointed out there is some math to be done.

perhaps it’s something like

20 copies = X sales
40 copies = 1.1X sales

so does the extra 10% in sales justify the extra cost of managing the inventory is the question. You cannot just assume that sales will remain the same regardless of the number of copies displayed. If that were true there would be many a marketing manager out of a job :wink:

What happens to the projections in this formula when a 10% projected increase in sales makes it so purchased product only covers 8 of the 10 stores (actually occurring in this case).

The product in question is not being shifted to a “preferential location” like an endcap, just being stacked higher in its existing presentation. Its also an across the board increase…not just selected items.

Well I can’t tell if this is what you want or not. . .

Say you know the average sales of a particular item is 2 per month. What are the chances I will sell exactly “x”’.

That would be the “Poisson” distribution, and most standard text books on statistics and probability will have a table of figures, or how to calculate.

The probability for average sales of 2:

0 .135
1 .276
2 .276
3 .181
4 .092 etc.

Of course if you don’t restock up to 4 each month, you have no probably of selling 4 right off the shelve. This distribution can be folded into the cost of inventory, profit etc.

Oh, okay. Um…fallacy of composition might be one name to search for. Another might be the homogeneity of the revenue function, the boss is assuming that it is homogenous of degree 1, maybe? I don’t know if there is a name for it.

It sounds like there’s more than one problem going on. The boss is assuming that sales are driven by inventory, and perhaps someone is confusing revenues with profits. But I really don’t know where you should search for the answer to the name of the fallacy. Sorry.

Not sure how it relates to your manufacturing example, but for the bookstore, you could also take shipping costs into account when you order the books. Shipping 20x is usually less expensive than shipping 10x twice, so if the savings in shipping is greater than the cost of storage, it might be worthwhile.