Economics Jim Hargrove, CEO Excess Inventory Neptune Essay

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Economics

Jim Hargrove, CEO

Excess inventory

Neptune has over 60 days' worth of inventory and is faced with some interesting solutions to address this issue. This memo will analyze the issue and the proposals put forth by the management team. The memo will conclude with a recommendation for action.

New fishing rules and new technology investments have allowed Neptune to take bigger catches. Despite record sales, the company is still accumulating inventory. There are two proposals on the table for addressing the inventory issue: launching a budget brand and decreasing fleet size.

Analysis of Underlying Issues: The solution should reflect the underlying problem. The company has increased its fleet with new additions. This increase in capacity is permanent. The government's new regulations are also pushing us into richer fishing grounds, again representing a permanent increase in capacity. Other firms in the industry are also facing a long-term increase in capacity.

Recommendation: The company should decrease the size of its fleet, rather than launching a budget brand. A price war is not sustainable and there is no evidence to support that price reductions will dramatically increase consumption, particularly if those reductions are matched by other firms within the industry.

Supporting Documentation.

The two main factors affecting supply have both been discussed. Each of these factors can be considered to be a long-run issue, and will be shared by other firms within the industry. The industry is characterized by monopolistic competition, so the price is expected to decrease somewhat, to a new equilibrium point. In order to maintain a higher price, the industry as a whole must cut production. Demand is impacted in part by the price of fish, but also in part by the desirability of fish products in the marketplace (consumer habits and preferences). Recent evidence shows a social trend towards healthier eating, but this has not had a significant impact on fish sales.

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Fish is typically a premium-priced source of protein and many consumers have responded by simply not incorporating fish into their diets.

The market is characterized by monopolistic competition. Many competitors are not differentiated, however, choosing instead to compete as cost leaders. These firms sell a mix of house and private label brands. Neptune competes as a differentiated producer and has made significant investments in production technology to support that position. The claim by one manager that these investments are sunk costs is not entirely accurate -- some of the process such as rapid deep-freezing are variable costs and therefore will continue to provide Neptune with a higher-than-average cost structure over the long run. It is expected that any move by Neptune to lower prices will be matched by the company's competitors.

The applicable branch of game theory is general equilibrium theory. Price and quantity are related. In this scenario, the quantity produced has increased, and this can be expected to push the price down. This is going to be the case until the price falls far enough to spur demand to meet the level of supply. For Neptune, this creates two problems. The first is that the new equilibrium level may not be high enough to cover the company's fixed costs -- the new ships may be a sunk cost for cash purposes but their depreciation expense still shows on the income statement. This would have the company lose money and there is some indication that starting a discount brand would cause the company to sell at a loss. The second problem is that the company is attempting to compete as a differentiated producer. It is….....

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