The way it works is your LHS places an order with their distributor - the distributor at the end of the month or period or whatever collects up all the orders from all the stores they supply, and sends that off as a bulk order to the manufacturer. The manufacturer then makes exactly that amount and then produces their percentage of standard run of spare parts, replacements, and so forth that go with that order based on the size of that order. This is shipped off to the distributor, who ships again to the LHS, which is why smaller stores are more expensive than bigger stores who are their own distributor.
Basically, it is down to the LHS to estimate how many models they will sell. The distributor and manufacturer are totally safe with this method, but force their customers to pay a higher price and the LHS to take the burden of risk - this is where customers are often lost, so they do their best to keep overheads low.
There is another way it can be done, which has the potential to cause major losses if a product is not in demand. This shifts the risk from the LHS to the manufacturer, but vastly reduces shipping time, especially at crucial times like just after the release of a new product - the batch run system involves producing a batch in advance, the size of that batch being based on estimates of how well the product will sell. Batch systems often use preordering as a way of estimating demand. Batch systems are relatively safe in small batches, but increase in risk factor as the batch sizes increase.
Steering the thread away from the subject for a moment onto the interesting subject of localised demand for models of local prototypes, I would like to add that I have noted this phenomenon myself. Where I live in England, Bachmann UK industries produce custom models of specific locomotives that worked in the county I live in - those orders that are for modern diesel locomotives that worked recently if not currently, sell in their largest numbers to local people. The theory I have developed is one that I arrived at after visiting local railways myself - seeing a railway in the flesh, has the psychological effect of making you want to model it. The more exposure you have to that specificl railway, the greater this urge is to model that specific line.
Maybe the posts pertaining to this subject should be split off into a seperate thread? It seems like an interesting subject of discussion.
