This confuses and infuriates me, lots of Food vans/stalls where i live have special niche’s such as selling croissants etc, and these places make an absolute KILLING and run out of stock so very early in the day, yet they never seem to decide to just have more ready for the day?
It doesnt make sense to me, it would increase profit, only difficulty i see is that its a risk that they dont need to take.
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Like others have explained, there are many practical reasons why this may be a good business decision. I want to focus on your assumption that ” it would increase profit” to increase their production. It’s not that simple, unfortunately…
This is what econometrists call the “Newsboy problem” (https://en.wikipedia.org/wiki/Newsvendor_model): the vendor needs to estimate how many items they will sell tomorrow, and they can’t adjust that number easily throughout the day. Because demand is a stochastic function (it is not the same everyday; there are some regularities and expectations, but the actual demand per day is quite random) it’s not possible to perfectly match production to demand. Selling fewer items than possible leads to missed profits, but having excess items that must be thrown away comes at a huge cost.
Let’s do some maths as an example. Suppose a vendor sells croissants for $1.00 and it costs $0.70 to make one (labour, ingredients, electricity, storage, transport). If they sell 100 units, they make a profit of $30, which is nice. If they sell out everyday, they may try to increase production to 120 units, making them $36 profit, which is even nicer. However, if they make 120 units (costing $84) and they only sell 110 units (gaining $110), their new profit is $26. More work for less profit, that’s not so great. The vendor actually has to almost sell out whatever they produce to make more profit, and wasting an item is much more costly than missing out on an additional sale.
So, in summary: they only make more profit by making more product if they can reliaby sell (almost) all of that extra product, and the additional profit is small compared to the loss they would suffer from unsold product, so scaling up is likely not very attractive. Only if production can be increased with little effort, demand is quite constant and predictable, and the profit-to-cost ratio is quite high, does it make sense to scale up production.
Hope it now makes more sense to you!
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