Image via Jeremy Brooks/Flickr CC
I hear it all the time and see it strategically placed in every business plan I encounter. It obviously needs to be addressed and is the fulcrum for most aspects of sales and marketing. It’s daunting for sure and so much time is put into its’ planning that most people have a plan in place to ensure their business is successful. What is it? Simply, how they will produce and manage inventory.
The elephant in the room that everyone avoids is the problem of a company being too successful and not being able to fulfill the orders that are coming in. It sounds like an obvious question to address in any plan but most plans I have seen don’t put any effort to mitigate this problem. The typical bravado answer is “bring it on.”
One of my clients was a t-shirt manufacturer. It seems like a cut and dried operation, printing shirts from walk-in traffic. Coming in batches of one or two dozen he made a good living at an easy pace. I asked him at one of our meetings what was his plan if he had too many orders at once. He fumbled a bit and said he didn’t know. The next day I called him and ordered 200 t’s for my business, a simple black shirt with “Doubt Kills the Warrior” in yellow on the front (I give them away). Then I told him I needed them in two days. Dead silence on the phone as he tried to figure out if I was serious — I was!
He said there was no way he could fill my order followed by numerous excuses and apologies. I told him to figure out a way. He subcontracted my order, made a little bit of money and learned the hard way that he needed to plan for too much business or the very least period of heavy traffic.
What a problem to have, too many people clamoring for your product. It’s a scenario every entrepreneur dreams about without thinking of the possible ramifications.
A company will run into cash flow issues if they keep too much inventory on hand and run the risk of losing customer loyalty if delivery takes too long. It’s a fine line between not being able to fulfill orders for want of inventory and having too much in your warehouse.
The inventory issue is complicated in many ways. Can your subcontractors keep up to demand, do you keep raw material in stock in case of price increases or a run on your product? Oprah’s recommendation on her show about a current book she is reading puts incredible pressure on book publishers to increase production or risk losing the momentum. I use Print on Demand through Amazon for my books but I know authors who have thousands of books in storage hoping to sell them one day. All that money tied up in inventory they probably never sell.
I have a friend who makes the world’s best and most in-demand fishing lures. It has been around for decades and is recognized for its craftsmanship, effectiveness and value. He was shipping to dozens of countries and realized that he could not keep up with orders. His backload of orders stretched from a couple of weeks delivery to months and he was afraid he would soon lose his vast store base.
I suggested setting up a couple of extra shifts in his plant but he settled for outsourcing his wood product to a subcontractor. All went fine until the manufacturer was purchased by another company and became a union shop. With an increase of more than 30% added to his product due to unionized employees he was forced to try to find another supplier. He had put weeks of training into the current contractor showing them the intricacies of how his product was made and he wasn’t looking forward to doing it for a new company. He couldn’t find a suitable manufacturer in Canada so he closed the business. It was a sad day for all.
My friend is a fighter so a year after closing his business, and considerable thought, he found a manufacturer in China. The product renowned for its quality and made of wood will now be made out of plastic but he is back in the game and I’m sure the product will be incredible.
A classic case is of another past client who felt success was getting her product listed with a big box store. She pitched her recycled shopping bag product to Canadian Tire (CTC:CA), one of Canada’s largest retail chains. They thought it was worth a look so asked for 50 bags for a test run in one of their Vancouver stores. She was excited and already had that amount in inventory. The store sold out of the bags in 20 minutes and offered her a spot in all of their 500 stores Canada-wide. After the shock and a run to the store for champagne, she number crunched the order. Her biggest order to date was 25 bags for a small independent grocery store. To manage this order she needed $250,000 just to make the product in China. The deal collapsed because she could not afford to place an order.
What is a company to do when the gold ring is within reach then is pulled away? With deep discounts she may have gotten the price down to $200k at another manufacturer but she couldn’t afford that price either.
There are options like having backup or cheaper suppliers but you can’t sacrifice quality for volume and without having done work with them in the past you don’t know what trouble you may end in. Lines of Credit are perfect for big order scenarios but again rely on exceptional credit with personal guarantees. Invoice factoring is useful but wouldn’t help the lady with her Canadian Tire order.
Factoring is often used to secure payment from the retailer for the account receivable but is only provided when the product is actually delivered. Invoice factoring requires an invoice as collateral. The factor pays the invoice to the client and has the retailer pay them. It allows the seller to receive payment without waiting the 3–6 months but comes at a cost of about 6–7% of the invoice.
There were options for the shopping bag order. She might have licensed the bag to someone who was already in heavy production or did a joint venture with someone who had a working relationship with a huge manufacturer.
Working on a business’ scalability is probably the best way to deal with that perfect order. Building your credit, developing relationships with manufacturers (who may give you credit down the road) and growing at a comfortable pace can reduce the heartbreak of turning down those huge orders.
I always told my clients never turn down an order there’s always a solution, just not the perfect solution.
For more information or to connect with me visit my site www.GaryBizzo.com
Originally published at www.equities.com.