Inventory is Evil

[AgainstAllOdds]

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.

 

[hughjasle]

Talk to your manu's/sourcers. I'm now paying only 30% on my inventory and pay the rest 30 days after I have it in my hands. For me, that's after it has been sold.

 

[ZCP]

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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[Walter Hay]

Maybe I'm not being clear...

If you have an inventory-based business with 50% margins, and you double your growth - to achieve that you either massively increased debt or didn't take out profits (depending on other costs, maybe both).

True enough, as soon as you stop growing, that profit becomes "accessible". But that's assuming nothing happens to degrade the value of that inventory. If your distributor knocks it off, you've now reinvested all your profits into a worthless asset. And who wants to stop growing?

I am NOT saying you shouldn't invest in inventory, just that if you are pursuing an inventory-based business you have to recognize the issues.

If a business is operating on a small margin like 50%, growth can be disastrous. I have seen many businesses fail because they have grown faster than they can fund.

This is why I have always looked for high margin products to sell. The result has been that I have been able to fund growing inventory out of profits, not from borrowing, while leaving me a very comfortable and highly satisfactory income as well.

My former importing business grew at a phenomenal rate, and I could afford to restock with ever increasing order sizes, and also pay family members to work for me. As sales continued to grow I still had no problem funding inventory from profits, but I had run out of family members to employ, and did not want to employ strangers, so I began selling franchises. Eventually those franchisees in four countries, following my methods, and reinvesting some of the profits, also built large businesses.

Not one of them had to borrow to buy inventory. All of them were earning at least 4 times the average wage (except one who only made 3x).

Profits begin with buying. Some people are happy with volume. I'm happy with profit and that profit had to give me a big ROI in relation to investment of my time.

Walter Hay

 

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[CPisHere]

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.

 

[Vigilante]

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]

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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[Vigilante]

This could be the thread that never ends.

For the record, everything that @JScott has said in this thread is correct.

Some of the other points that have been raised in the thread are marginally correct also, but superseded by the fundamental points that @JScott has made.

With that, I will exit stage left and let the Millennials continue to argue against the experienced.

 

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[Walter Hay]

Many businesses operate on 25-30% margins.

How do you manage growth with moderate margins?

Is this primarily based on choosing the right type of business? Or can it be substantially affected within a business?

Managing growth on moderate margins becomes a juggling act. Some people are good at it - I'm not. I know that managing cash flow is vital.

The best suggestion I can offer is to factor in a discount for COD, or payment within 7 days. I had no option but to do that in my first business because I had virtually no capital.

Choosing the right type of business can make all the difference. In my first business I had unique products, a number of which were my own invention. Once a customer started using them, they were hooked. To illustrate: I once passed through a picket line, wearing my suit and driving my expensive car, with the trunk loaded with product without which the entire production line in that large factory would have shut down. When a customer knows they need you that much, price is no object.

The customer loyalty throughout that industry was so great that when a potential competitor offered an alternative product at half my price, customers called to tell me about it and asked if I would like them to obtain a sample so that I could evaluate it. I lost one customer nationwide, and they came back to me cap in hand a few months later.

In my second business (importing) I chose a market segment (niche) that was very poorly served. I started off selling at double the competitors' prices, and had no trouble defeating their ineffective marketing. Several competitors went out of business, unable to get the sales even at their much lower prices.

Walter

 

[CPisHere]

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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[GuestUser450]

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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[ddzc]

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.

 

[OldFaithful]

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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[ZCP]

My attempted add to the thread was that lowering the required WCR was one good place to optimize that is sometimes overlooked. Smart inventory controls that maximize turnover. If you are looking for money in the business, sometimes that is a good first place to go. Attack cost. Attack WCR. Do that internally while pushing sales externally.

 

[Walter Hay]

I'm curious because I never considered a 50% margin to be low. What are high margins in your opinion? 80-90%? Are we talking gross margin, net margin? I honestly can't even imagine such high margins, since right now my advertising cost alone is usually 30-40% of revenue and COGS another 25%. Seems like I have to change my mindset regarding this.

I am talking about gross margin after taking into account all landed costs. I have always operated my businesses on low overheads because they can eat up profits.

Yes I agree that 80-90% would be a high margin. I think it is more readily achievable in B2B sales than online consumer sales, but it is certainly possible even there.

My two previous business were both B2B. With the first I was making so much money as a one person operation that after becoming well established I didn't look for new business. It came to me by referrals, but I would only accept new customers if I could maintain that high margin.

The second, importing, was also highly profitable and having a great USP and very effective marketing, sales grew at a phenomenal rate. It was easy to franchise because I could confidently promise franchisees a high ROI. One wrote: "It was nice to make that occasional $50,000 for half a days work". He was talking about a series of repeat orders for which his landed cost was only $5,700. My best profit percentage didn't equal his. I sold 1,000 items to a customer for $21,000. My landed cost was $3,000.

My best marketing tool in both businesses was direct mail. In the first one, my letter offered for a nominal charge a sample large enough for a small production run. In the case of the importing business, many of the products were very small, so partly to demonstrate quality, but mainly to ensure that the mailing received attention, the letter had a sample attached. Conversion rates were above direct mail industry average.

I explain this because effective advertising can cut your costs.

If advertising costs are high and are badly affecting net profit, it could be necessary to think laterally and consider other marketing methods. By way of example: If you sell generic type products, what outlets are there beside online?

It might be necessary to review your purchasing. Having bought a large variety of products from China, Taiwan, Malaysia, Vietnam and other countries I know that some manufacturers have become westernised in their outlook, and as a result they look for bigger profit margins. Try to find the more traditional Asian business people who are happy to work on very low margins. This difference in outlook is often the explanation for the huge discrepancies in quoted prices.

Walter

 

[Sanj Modha]

I let my suppliers handle all that now. Owning inventory is a headache and I've been stuck with stock in the past which needed liquidating.

 

[MotiveInMotion]

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

 

[Ecom man]

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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[GuestUser450]

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...

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]

Okay, I think I see the disconnect here...

Investing in inventory doesn't change your income; it simply changes your cash flow histogram. If you're running a business where you need the monthly profits to survive, then I agree that you shouldn't pursue a business that relies on inventory. If you can't live without the profits from your business for whatever your inventory turnover period is, your not properly capitalized to run an inventory-based business, as growth will cause you to starve.

This goes back to my earlier point about inventory being a barrier-to-entry. Because it requires an investment and (if you're successful) the ability to reinvest income back into the business, there are a lot of people who aren't in a position to start these types of businesses. That's one of the reason I love these types of businesses -- unlike drop-shipping businesses or IM/affiliate type businesses, I don't have to worry about every wannabe entrepreneur competing with me.

So, again, if you're in a position where you can't afford not to take money out of your business for a couple inventory cycles, I'd recommend not getting into an inventory-based business. This happens not to be an issue for me -- I don't mind not being able to take profits from the business, as my goal is an eventual exit strategy, not living off the business income in the short-term.

Correct. I agree completely. The problem is most people going into inventory-based businesses do not realize this, which unfortunately included me. Luckily I've been able to stick it out but it's been a painful learning curve.

Btw, in your example above, the only way I find myself not earning any profits is if I'm doubling sales during every inventory-turnover period -- if I can realistically do that, I'd be a billion dollar business within 18 months. If that's my biggest risk, I'll take it...

What do you consider a very healthy growth rate for an inventory-based business?

 

[theag]

If a business is operating on a small margin like 50%, growth can be disastrous. I have seen many businesses fail because they have grown faster than they can fund.

This is why I have always looked for high margin products to sell. The result has been that I have been able to fund growing inventory out of profits, not from borrowing, while leaving me a very comfortable and highly satisfactory income as well.

My former importing business grew at a phenomenal rate, and I could afford to restock with ever increasing order sizes, and also pay family members to work for me. As sales continued to grow I still had no problem funding inventory from profits, but I had run out of family members to employ, and did not want to employ strangers, so I began selling franchises. Eventually those franchisees in four countries, following my methods, and reinvesting some of the profits, also built large businesses.

Not one of them had to borrow to buy inventory. All of them were earning at least 4 times the average wage (except one who only made 3x).

Profits begin with buying. Some people are happy with volume. I'm happy with profit and that profit had to give me a big ROI in relation to investment of my time.

Walter Hay

I'm curious because I never considered a 50% margin to be low. What are high margins in your opinion? 80-90%? Are we talking gross margin, net margin? I honestly can't even imagine such high margins, since right now my advertising cost alone is usually 30-40% of revenue and COGS another 25%. Seems like I have to change my mindset regarding this.

 

[Mac]

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

 

[theag]

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.

 

[TTG SS]

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?

 

[Walter Hay]

It did mention raising prices (which would mean higher margins).

The article also mentions Buffett's two retail investments & says one of the keys to their success is much lower prices & margins than the rest of the industry, which I found very surprising because it they are inventory-heavy businesses (furniture & jewelry) so it seems like that would make taking cash out difficult.

I don't know about the furniture industry, but I do know that the retail jewelry industry works on massive margins, so selling at below the usual margins in the industry could still provide big margins.

Walter

 

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[Scot]

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.

 

[CPisHere]

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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[Sanj Modha]

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.

 

[CPisHere]

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?

 

[CPisHere]

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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