Weaponizing inventory

Just a few years ago, a concept known as JIT (just in time) inventory was the rage. The basic concepts of JIT are as follows:

• Excess inventory is wasteful. It eats up cash in a business and is also expensive because it has to be stored.
• Inventory purchasing decisions need to be based on hard numbers and should be made in such a way that as little inventory is on the books as possible. Ideally, inventory does not show up until the day it is needed.

JIT often goes hand-in-hand with Lean manufacturing, a very valuable way of looking at operations that has influenced us at Capacify. We like Lean and we like JIT, but we see them as separate things. Lean pretty much just works in about every situation, but JIT has a real disadvantage that creates problems in many businesses.

To illustrate this problem, we do not need to look back more than a few years to the covid pandemic. Overnight, businesses realized how fragile their supply chain was, and they had to rethink JIT. Businesses that had the ability to adjust survived and often flourished. Other businesses failed simply because they were unable to get the inventory they needed.

At the beginning of the pandemic, we were operating a particular DTC business that had sales triple overnight. Because we only had 30-60 days of inventory on the shelf, we started placing reorders right away. That is when we realized we had a big problem. Our manufacturer could not get key raw ingredients and our orders could not be filled. It took months for things to get back to normal; in fact, we still operate that business and some products are still unavailable.

What we quickly learned was that sales were of little value without inventory to sell. As a wise business person once said, “he who has the inventory wins.”

While we have never been strong on JIT, covid forever affected the way we viewed inventory. I think it probably changed a lot of perspectives in the industry. Suddenly, holding inventory became the new business strategy. And yes, the pendulum swung the other way. During 2022, companies found themselves overstocked with inventory they could not sell, leading to heavy discounting and more losses. There is nothing easy about this.

There is another maxim from a wise business person that I have never forgotten: the real money is made in how you buy rather than how you sell. That is perhaps a bit of an overstatement, but buying inventory well is at least as critical to your success as selling it. It is not an afterthought to a DTC or Ecommerce business. It is the business.

That is why inventory is a key component of the Capacify Doctrine. We focus on inventory because we believe it can give companies a big strategic advantage over their competition.

Here are a few of the more important factors to consider when making purchasing decisions:

• What are the risk factors that would jeopardize the complete supply chain? In other words, you have to consider not just your manufacturers’ risks but the risks affecting the manufacturers’ suppliers.
• What is the ROI on keeping more inventory on hand (what discounts are available)?
• What is the opportunity cost related to potentially running out of inventory?
• What is the opportunity cost related to tying up more cash in inventory (when it could be deployed elsewhere)?
• What is the risk of not selling through the inventory?
• How competitive advantages can you obtain by carrying more inventory than your competitors?

Our general rule of thumb on inventory is related to another Capacify Doctrine tenet about growth. Growth should be deep before wide, which means we should focus on what we already do successfully and invest the time/money to do it better. Rather than chasing another revenue stream, very often, companies should invest their capital into making the customer experience better by making sure there is inventory to sell them.

In other words, we generally think that JIT is a pretty bad idea for DTC/Ecom businesses. It is far better to accept a bit of inefficiency, boost the inventory, and ensure that you have products to sell when the orders roll in. That is the first step to weaponizing your inventory.