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Inventory is Evil

CPisHere

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Dan Kennedy (and others) say "Inventory is Evil".

Owning an inventory-based business, I have to agree.
#1 it's expensive to get started or grow - as you have to buy inventory before you can sell it
#2 it's a giant risk for not moving (requiring mark downs), getting stolen, going obsolete, etc
#3 long cash conversion cycle means lots of debt

Macy's has a 50+ day cash conversion cycle (how long it takes from when they pay for the goods until they collect money from their customers), while Apply has a NEGATIVE 50 day cash conversion cycle - meaning they GET PAID 50 days before they have to pay their vendors. You can't understand how huge this is unless you've run a business before, but this means Apple can grow their business interest-free.

What are your thoughts on inventory? How do you manage it?

PS: For many businesses inventory is a NECESSARY evil which can be used to create value, but it's still evil.
 
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Scot

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Dan Kennedy (and others) say "Inventory is Evil".

Owning an inventory-based business, I have to agree.
#1 it's expensive to get started or grow - as you have to buy inventory before you can sell it
#2 it's a giant risk for not moving (requiring mark downs), getting stolen, going obsolete, etc
#3 long cash conversion cycle means lots of debt

Macy's has a 50+ day cash conversion cycle (how long it takes from when they pay for the goods until they collect money from their customers), while Apply has a NEGATIVE 50 day cash conversion cycle - meaning they GET PAID 50 days before they have to pay their vendors. You can't understand how huge this is unless you've run a business before, but this means Apple can grow their business interest-free.

What are your thoughts on inventory? How do you manage it?


In today's current market, obviously depending on the products, it would seem smart to me, as a startup to operate a business run via drop ship.

Instead of piling massive warehouses full of stock, only produce, purchase and ship an item as its paid for.
 

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Do everything you can to drive down the WCR of your business!
Lot of business investment goes into inventory prediction and control.
Things we have done: get money upfront, use prediction models and calendar to control inventory buying, use drop shipping and vendor credit where able, push collections efforts, split invoicing.....
 
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AgainstAllOdds

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Do everything you can to drive down the WCR of your business!
Lot of business investment goes into inventory prediction and control.
Things we have done: get money upfront, use prediction models and calendar to control inventory buying, use drop shipping and vendor credit where able, push collections efforts, split invoicing.....

This.

You also can't get into a lot of industries without holding inventory. Take your examples. Apple is in the manufacturing and distribution space. Macy's is in retail. For Macy's to be successful, they can't have customers come in and buy clothes 50+ days ahead of time. They have to hold inventory, and accurately predict the returns on inventory in order to get a return.

Same with a lot of other industries.

Inventory is only evil if you cannot accurately predict your risk on investing in that inventory.
 

CPisHere

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To each his own, but to generalize that "inventory is evil" seems to be a very myopic view on business models...
Tim Cook himself has said that inventory is fundamentally evil. For some businesses it is a NECESSARY evil - and those business certainly have other positives that may outweigh it, but it's still evil.
 
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CPisHere

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Do everything you can to drive down the WCR of your business!
FYI for others, WCR = Working Capital Requirements.

This & cash conversion cycle are two concepts I never learned before opening an inventory-based business that I wish I would have. They can be managed but if you don't recognize them & pay attention to them they will destroy you.
 

MotiveInMotion

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FYI for others, WCR = Working Capital Requirements.

This & cash conversion cycle are two concepts I never learned before opening an inventory-based business that I wish I would have. They can be managed but if you don't recognize them & pay attention to them they will destroy you.

Great points and thanks for clarifying WCR. These are also two things I never considered when making the shift from drop-shipping to importing and wish someone had told me.

Drop-shipping is great and what not, but it definitely violates C & E of CENTS... Importing can successfully avoid those missteps, except for the fact that your business is based on whoever makes your products. If you can own the entire chain from manufacturer down, you're set.

Like you've stated, it's super important to understand beforehand how much capital will be tied up into something, because that's pretty much a sunk cost. I want to re-iterate that for others as well.. Cash conversion these days on Amazon can be pretty short, but with your own company and CMS / B & M, it varies greatly.

Thanks for starting this thread! Dan Kennedy is one who's work I've been diving deeply into as of late
 
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CPisHere

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I guess Tim Cook and I disagree on the definition of "evil" then... Personally, anything that is differentiating me from my competitors and allowing me to make a lot of money isn't "evil"... Perhaps that's just me...

And btw, while I haven't seen the Cook quote, I'd be willing to bet that his implication is that "more inventory than necessary" is what is evil, not inventory itself. It's about optimizing the supply chain...
Inventory is something you can use to differentiate yourself, absolutely. And inventory is generally good for/valuable to the consumer. But for profits, and actually taking cash out of a business, it's terrible. Push that burden to others as much as possible.

People assume that big retailers get a much better price than small independent retailers, which is somewhat true, but the biggest benefit they get is that they transfer the liability of the product not selling onto the manufacturer & use tricks to get extended 90 day payment terms. These tactics often end up bankrupting small manufacturers trying to sell to big retailers - because of the extreme pressure the inventory & poor cash-conversion puts on them.
 
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Mac

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That's why you pre-sell before every new product launch. Or validate the product first with AdWords or FB Ads.
 

theag

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That's why you pre-sell before every new product launch. Or validate the product first with AdWords or FB Ads.
Thats a method of testing demand and has nothing to do with this discussion about inventory levels.
 

Ecom man

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I disagree with inventory being evil. Is money tied up? Absolutely! Can you become inventory poor if you allow your business to become that way? Of course. It really comes down to managing the inventory. For my business I would rather over order and have some extra inventory sitting around than to miss out of sales because of lack of inventory.

Drop shipping allows you to tie up less money sure but it's weakness is normally slow shipping times. Shipping time is a major issue for many customers. I spent 1k on Amazon yesterday because the items would be here in 2 days rather than the 7 days on other websites. Shipping speed gives you a competitive advantage.
 
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TTG SS

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Inventory is only evil if ill managed, just like anything else in life.

Could someone explain to me how an E commerce store would differ from a manufacturing company in terms on cash flow?

For example, when I pay a supplier of goods, I would generally pay in cash or credit(not huge orders). So once I receive that product and start selling, I would have essentially instant cash flow(assuming I'm profitable), right? Cause its not like I'm extending terms to anyone on Amazon. Relatively easy to manage, at a small scale.

Another example would be my parents own a manufacturing company, lets say they get a purchase order for a $1,000,000 and it is due within 90 days ARO. So in that time they would need to buy the materials, pay employees & overhead and even after they ship, they may still have to wait 30-60 days to get paid. So naturally that seems a bit trickier to manage, am I right?
 
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Sanj Modha

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There's pros and cons to both sides of the fence. Owning inventory gives you control over processes and quality. Using a distributor/co-packer/dropshipper is less control, less profit and less headache. I only work with a few suppliers now so quality isn't a problem. For one of my best sellers, the vendor adds my logos and handles all my returns too.

For those reasons, I choose not to own inventory but it's different for all businesses.
 
G

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On the cash flow statement, it's literally cash; increased inventory = negative cash flow.

So it's cash...that's on fire. And every day it sits, it continues to burn.

The math is the same regardless of model. In SaaS we run the same numbers; we want predictable acquisition of annually prepaid recurring revenue and work backwards from there.
 
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CPisHere

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On the cash flow statement, it's literally cash; increased inventory = negative cash flow.

So it's cash...that's on fire. And every day it sits, it continues to burn.
Great analogy.

The math is the same regardless of model. In SaaS we run the same numbers; we want predictable acquisition of annually prepaid recurring revenue and work backwards from there.
Can you explain further?
 

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This thread is rather odd. If you want a real business, selling a unique product line with your own brand, you need inventory and full control over it. There's no way around it. How is there even a debate over this? The only people agreeing with this notion of "inventory is evil" are dropshippers and affiliate marketers.
 

CPisHere

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This thread is rather odd. If you want a real business, selling a unique product line with your own brand, you need inventory and full control over it. There's no way around it. How is there even a debate over this? The only people agreeing with this notion of "inventory is evil" are dropshippers and affiliate marketers.
This thread is rather odd. If you want a real business, selling a unique product line with your own brand, you need inventory and full control over it. There's no way around it. How is there even a debate over this? The only people agreeing with this notion of "inventory is evil" are dropshippers and affiliate marketers.
I own a physical retail store, and I'm saying Inventory is evil. It's a NECESSARY evil, but it's still evil.
 
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CPisHere

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I'm glad I've got a conversation going.

Some people seem to believe that since Inventory is necessary and/or valuable, it can't be evil.

Let's go one step further... What about employees? Are employees a necessary evil?
 

ddzc

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I own a physical retail store, and I'm saying Inventory is evil. It's a NECESSARY evil, but it's still evil.

I was coming at this from an online business angle. For a brick and mortar store which potentially sells hundreds of different types of products, inventory plus TONS of other elements of this type of business are beyond evil and something I would never consider getting myself in to.
 
G

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Can you explain further?

Predictable acquisition = Knowing the cost to buy a customer - paid media is easiest but can include whatever channels work for you
Annual prepaid = having a year's worth of cash now to use to acquire new customers this month
Recurring revenue = cash, growing compoundly month over month

Are you implying that any business that has equipment, suppliers, vendors, employees, loans, etc., is bad?
I find it hilarious that so many people are ignorant of the fact...

:confused: We're making the same point. No, I don't think inventory is evil - just another number to measure and manage.

In hindsight my post should have been: "Math is good to know."
 
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CPisHere

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Sure, just like everything else negative on the statement of cash flows. Things like equipment purchases, paying suppliers/vendors, paying employees, paying loan costs, etc.

Are you implying that any business that has equipment, suppliers, vendors, employees, loans, etc., is bad? That every negative expense on a cash flow statement is indicative of a company "burning cash?"
Anything that restricts growth & prevents you from removing profits from a business is evil. The problem with inventory, and in some cases Equipment, is that it seriously harms your ability to grow and/or actually take "on paper" profits out the business in cash.
 

CPisHere

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Sounds like your problem is that your inventory is commodity. Personally, the inventory I keep in my business is unique (it's my product). While you say that having inventory harms your ability to grow, for me, it's impossible for me to grow without my inventory. Without my inventory, I have no business, and therefore growth would be zero.

If you're just selling a commodity online, then sure, having inventory may make it difficult for you to grow. But, when you sell a unique product, it can be very hard (perhaps impossible, depending on the product) not to hold inventory. And since inventory of a unique product can be the entire basis of revenue in a business (it is in mine), that's okay with me!

So, while you think, "Inventory is evil," I'm thinking, "Inventory is my competitive advantage." If you hate inventory so much, perhaps you should consider a different business? Or, perhaps you should focus on selling non-commodity goods and then your inventory will BE your business.
Your product is your unique advantage, and to sell it you need inventory. But if you have 50% margins & double your sales, all of your profit is now tied-up in inventory.
 

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Perhaps it would helpful to ask: Does having this inventory investment help my customer? Does it meet THEIR need?

1) If the customer wants/expects delivery that can only be provided by keeping inventory on hand, then it's good for the customer. Someone, somewhere needs to have inventory to meet the customer's need.

2) If the customer is less concerned about immediate delivery, then it may not be necessary to hold an inventory. "Just in Time" production and shipping will often suffice.

Let's not deceive ourselves, asking the manufacturer (or whomever the previous link in the supply chain might be) to hold the inventory is not a free benefit. That supplier will determine their risk & cost for holding the inventory and pass that cost along to you/us in the form of higher pricing!
 
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TTG SS

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Your product is your unique advantage, and to sell it you need inventory. But if you have 50% margins & double your sales, all of your profit is now tied-up in inventory.

I don't see the issue as long as you're growing?

Eventually everything should catch up and you'll be able to retain profits. In an ideal situation. Obviously that's part of the long term play though and not great if you want instant profits.
 

ZCP

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Good conversation. Everyone is agreeing and polarizing at the same time. :)

So, @JScott , if we came to you and said we could lower your required expenditures on inventory through analytic analysis, you would just reinvest the money in more inventory? Could understand that if you had cornered the world's supply of industrial diamonds. But for a standard consumer product? Why tie up more money in the business than necessary to meet sales / growth?
 

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Inventory is a barrier to Entry.

Conversely, for a product centric business, drop shipping violates the commandments of Entry and Control.

Dollar Shave Club just sold for $1,000,000,000 after five years of operating an inventory-laden business. If they were drop shippers, they would have been dispensable and the value of their business would have been no more than the value of the last box their drop shipping vendor shipped on their behalf.

Are we really having a discussion about inventory? Have a discussion about turnover... fine. But having a discussion about a product based business having inventory? Millennials.
 
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CPisHere

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I don't see the issue as long as you're growing?

Eventually everything should catch up and you'll be able to retain profits. In an ideal situation. Obviously that's part of the long term play though and not great if you want instant profits.
Can you pay your bills with growth?
 

CPisHere

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First, that's math is meaningless...the day I started my business, I invested an infinite multiple of my profit into inventory -- was that a mistake?
Just because it's Evil doesn't mean you shouldn't invest in it. Obviously you should if your business requires it.

But let's take an information marketing business from a few years ago as an example. They have $100,000 in DVD's for inventory, which they believe is a competitive advantage and necessary for getting sales. Suddenly the internet allows them to make all that revenue without holding inventory. Their business is infinitely better off as a result. Oh, and that $100k of inventory is now worthless - years of "reinvested profits" that weren't taken from the business become nothing but a write-off.

Regardless, do you have a business where you don't need to invest in growth? If so, either you have a business that isn't growing, you're growing by investing your own time or you have a unicorn of a business that doesn't require investment to grow.

I love to invest in business growth (it means my business is growing), whether that's investment in inventory, employees, warehouse space or whatever.
The difference is whether it restricts your ability to take profits from the business and if you can re-adjust the investment.
 

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