Bootstrapping Inventory Management Gone Right

I recently came across a fantastic presentation called The Resilience of Costco. The entirety is worth clicking through because Costco is a fascinating case study. They are thriving with in-store retail when others are struggling. There are a whole host of reasons why they’re able to do this, from their membership model to their limited SKU selection to their cheap warehouse space, or even how well they compensate their employees. One slide about inventory management really stuck out to me, and it reminded me that I’ve been meaning to follow up on one of my favorite posts, Inventory – the Death of e-Commerce Companies, Large and Small.

That post, written in 2010, focused on how difficult it is to manage inventory, whether you’re just starting out, a few years in like we were at the time, or even a fast-growing company like Zappos, who had just sold to Amazon in part because of their cash-flow issues. If you’re growing slow, inventory management is a problem. If you’re growing fast, it can be an even bigger problem.

At the time, we were in the middle of the chaos and it was a constant struggle for us. Sales were great, cash flow was not. I suggested that the only real solution was an abundance of cash:

There are really only two ways for a retail business to get a shit load of cash. 1) You start out with it because you’re rich. 2) You slowly but surely build it up over years and years of profits.

I also wrote:

This isn’t a one or two year thing, it’s a 5-15 year thing. It means absolutely minimizing other expenses (most notably, new product lines, employees and warehouse costs) until that revolving cash flow cycle eventually starts to turn in your favor. If you’re profiting, it will

As I write this now, 10 years later, that was 100% correct. It did take 5-15 years (in large part because we’ve continued to expand, with over 1,800 products and almost 80 brands on the site today, as well as two warehouse expansions and going from a team of 4 or 5 to a team of 14), but over the past few years the tide has turned and we’ve been able to turn this disadvantage into a major advantage. And the most notable advantage is the one that the Costco presentation nails:

costco idle inventory

What that slide describes is the holy grail of inventory management. If you can sell your inventory before the bill on that inventory is due, your vendors end up financing your business. The risk shifts from you to them. Now, unlike in those examples I wrote in 2010, when your bill comes due you’ve already realized the profit on that inventory. This completely changes the game.

While achieving this isn’t hard, it isn’t exactly easy either. You need to manage your inventory very well. That means accurate forecasting. It also means aggressively getting rid of under-performing products, which involves understanding all of the costs involved in carrying a product (such as holding costs of it sitting on your shelves, and opportunity costs relative to stocking a better item). It’s no accident that our Clearance section is almost always full of products.

The other big piece of the puzzle is negotiating payment terms. Once you have a long-standing relationship with a vendor, you can negotiate that net 30 to a net 45 or net 60. Or get 2% back when you pay net 15. Or, if you have to pay via credit card, find a card with great rewards or bonuses for paying early.

Even if you’re doing an A+ job, all of this still does take some time. But it certainly is possible and is worth aspiring to if you’re a new retailer. I had always hoped that we would get here, and I believed it, but back in 2010 I wasn’t completely sure.

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