Over my last few years as a consultant, I’ve seen many interesting ways in which markets have emerged where they shouldn’t have, creating havoc in pricing and scarcity. Fixed prices fluctuate, free goods acquire a value, and non-tradeable goods are traded. I’ll share a few of these examples over the next few weeks.
Once, a fan manufacturer asked us, We did an analysis and found that our wholesalers’ margins fluctuate. How could that happen, when we are fixing their buying and selling prices?
The manufacturer sells several popular fans. Their highest selling fan (call it HS), for instance, was sold to wholesalers at Rs 1,089, who would then sell it to retailers at Rs 1,100. No question of margin fluctuation.
I took a trip to Lohar Chawl, the wholesale fan market, to get to the bottom of this. After a few conversations in dingy warehourses, here’s what I discovered. Fans are bartered. Wholesalers keep as little cash and inventory on hand. Often, a retailer would order a fan (say X) not in stock. The wholesaler doesn’t want to lose the deal, and doesn’t have cash, but he would have some inventory of HS, since it’s such a high-selling fan. He goes to another wholesaler, and says,
“Give me some fan X, and I’ll give you some HS fans instead. You’ll be able to sell these HS fans fairly quickly anyway.”
“Why should I? Tell me your customers name and I’ll sell it to him myself, and make the profit.”
“Tell you what. I’ll give you my HS fans for Rs 1,079 instead of Rs 1,089. You’ll get a higher margin when you sell it.”
This is a routine matter in Lohar Chawl. If you don’t have a fan, barter it for another (often HS) at a discounted price. So the wholesaler’s margin would depend on how many fans they bought at a bartered price!
Poaching was another reason for the margin fluctuation. The manufacturer demarcated territories for each wholesaler, saying “You can sell the these 20 retailers, you can sell to those 18, and so on.” Ambitious wholesalers, or those with inventory to dump, would do a side deal with a retailer.
Look, your wholesaler charges Rs 1,100 for this fan. I’ll sell you this lot for Rs 1,095. And let’s keep it quiet.”
Yet another reason for margin fluctuation was smuggling. Sometimes, the wholesalers would be able to smuggle fans into Mumbai without paying octroi. And sometimes they wouldn’t.
The biggest lesson for me from this was, It’s bloody tough to restrict a free market. I’ll tell you more about this shortly.
🙂 Bloody tough indeed ! lemme guess,these were all gujjus !rite ?? ingenuous, i tell you,these guys..
Neat! Thanks for those Excel tips. And look forward to more of these!
I have noticed instances where a TN Auto Distributor comes and sells his stuff to a Karnataka retailer! How did you solve this problem? in my case, which was personal advice to a friend, we wrote to the company with some of the fake bills etc and asked for a higher discount for my friend who is a karnataka distributor, things like CST also start to matter in inter-state things. now the problem has come down bcos of VAT
I did this work as part of a proposal. We finally didn’t get the project. But I suspect (and will try and show over the next few posts) that this is a problem that’s probably not worth fighting. The market will eventually win!
Ideally a very good supply chain management system will help solve this problem atleast. For eg: If i can order and get it immediately instead of having to bargain. Another issue is how was fan X priced? If its lower than 1089, it will also solve the problem
The problem wasn’t supply chain lead-time, but shortage of cash for inventory among wholesalers. Whenever they were short of stock in one fan, they’d sell some other fan they had as inventory to get the fan they were short of. They can’t order it from the manufacturer, remember: they’re short of cash. They NEED to barter.
the fan company had no clue why the margins were fluctuating ? scary thought. how could they not know about this. I presume it is top management that did not know this
Ok. A SCM which can even take in account demand considerations is ideal. But how can the HS and X be priced the same to the retailers? Isnt that failure of the market? Shouldnt a HS fan be priced different(higher?) than some random fan X?
Madhu, you’re right. The fans ARE priced differently. So it won’t be a one-to-one barter. If Fan X is priced at 1000, the wholesaler will give agree to sell 10 HS fans at Rs 1079, give 10 HS fans PLUS 790 Rs, and get 10 Fan X in return.
Joe, even the line mgmt didn’t know about this bartering! One of my colleagues discovered it. This guy’s a god of black money market operations, incidentally 🙂
This is something similar to the SJP Road market in Bangalore where u can buy computer parts at ” SJP Road price “. the shopkeepers will undercut even the wholesaler price and sell it for ” cash ”