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The cost of inventory is a gamble that you'll be able to sell it. If that cost grows but the upside doesn't, you literally cannot afford to take the risk of buy

The cost of inventory is a gamble that you'll be able to sell it. If that cost grows but the upside doesn't, you literally cannot afford to take the risk of buying inventory that you hope to sell.

torstenvl 5y ago
JIT supply lines, sales tracking and inventory software integration, and the sophisticated sales forecasting that enables, change the risk calculation. But parasitic margins seem just as bad now as ever. I'm not convinced by this argument.
- lotsofpulp 5y ago
  > But parasitic margins seem just as bad now as ever. What parasitic margins? Retail operations have 2% to 4% profit margins, and even Nike has around 10%, maybe 12% some years.
  - Clubber 5y ago
    Isn't most of that outside cost to manufacture though?
    - lotsofpulp 5y ago
      What does that mean? My point is starting a clothing company and using manufacturers in Asia is not going to bring any notable amount of riches due to not being able to earn “parasitic margins”.
  - adventured 5y ago
    That's pretty close. To put some numbers to it - Operating income margins for 2019 (this is before taxes, and using pre-Covid). Deckers 16%, Nike 12.2%, V.F. Corp 12%, Adidas 11.3%, Crocs 10.4%, Skechers 10%, Steve Madden 10%, Foot Locker 9.3%, Wolverine 7.5%, Shoe Carnival 4.8%, Under Armour 4.5%, Caleres 4%, Designer Brands Inc 3.7% Look at what Under Armour charges and look at those horrific margins. By comparison, big tech's operating income margins: Facebook 42.5%, Microsoft 41.6%, Oracle 38.5%, Adobe 35.4%, Nvidia 33.3%, Qualcomm 31.7%, Intel 29.2%, Apple 28.7%, Google 28.4%, Cisco 27.5%, Netflix 21.8%, and so on.
- randallsquared 5y ago
  All those can help for some types of business. But as we've seen from the supply-chain disruptions since the start of the pandemic, there's also a cost of cutting things close. You can choose whether to typically err on the side of too much or too little, and you can do things that lower the likely size and probability of the error, but you can't just decide not to ever get it wrong, and getting it wrong will cost money.
- nradov 5y ago
  That doesn't actually work very well for shoes and apparel. Demand is hard to forecast due to changing consumer tastes, and lead times are too long to adjust orders up or down quickly.
smhost 5y ago
Why is it so inefficient?
- randallsquared 5y ago
  Maybe it only looks inefficient because we're comparing against a fantasy economy where nothing bad happens and no losses have to be recouped. :)
  - lotsofpulp 5y ago
    Just like the fantasy that these companies that outsource are earning giant profits, when a look at their 10-Ks shows pretty average profit margins for a business that wants to stay in business.
ralfd 5y ago
Sure, but why does the cost quadruple? If a china shoe costs 15 dollar less to make, why doesn’t it stay 15 dollars at the price the consumer sees?
- tomnipotent 5y ago
  It costs money to sell shoes. You have duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots. And if you're manufacturing original designs, you also have a year-long lead process, manufacturing obligations and scheduling, sample management, maybe even material procurement. The cost of the shoe ends up only being a third of overall costs. I'm also not going to sell everything, but I still need to keep buying inventory to keep the machine going. If I don't sell the product at least 3x what I paid for it, there's no way I can maintain sufficient capital to keep a business running and hedge against risks.
  - NickNameNick 5y ago
    Of the costs you list: > duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots Only the Duties automatically scale with inventory cost. like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
    - icegreentea2 5y ago
      One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
      - Dylan16807 5y ago
        Yes, a component. But it shouldn't be roughly the entire cost that scales that way.

The cost of inventory is a gamble that you'll be able to sell it. If that cost grows but the upside doesn't, you literally cannot afford to take the risk of buying inventory that you hope to sell.

torstenvl 5y ago

JIT supply lines, sales tracking and inventory software integration, and the sophisticated sales forecasting that enables, change the risk calculation. But parasitic margins seem just as bad now as ever. I'm not convinced by this argument.

lotsofpulp 5y ago
> But parasitic margins seem just as bad now as ever. What parasitic margins? Retail operations have 2% to 4% profit margins, and even Nike has around 10%, maybe 12% some years.
- Clubber 5y ago
  Isn't most of that outside cost to manufacture though?
  - lotsofpulp 5y ago
    What does that mean? My point is starting a clothing company and using manufacturers in Asia is not going to bring any notable amount of riches due to not being able to earn “parasitic margins”.
- adventured 5y ago
  That's pretty close. To put some numbers to it - Operating income margins for 2019 (this is before taxes, and using pre-Covid). Deckers 16%, Nike 12.2%, V.F. Corp 12%, Adidas 11.3%, Crocs 10.4%, Skechers 10%, Steve Madden 10%, Foot Locker 9.3%, Wolverine 7.5%, Shoe Carnival 4.8%, Under Armour 4.5%, Caleres 4%, Designer Brands Inc 3.7% Look at what Under Armour charges and look at those horrific margins. By comparison, big tech's operating income margins: Facebook 42.5%, Microsoft 41.6%, Oracle 38.5%, Adobe 35.4%, Nvidia 33.3%, Qualcomm 31.7%, Intel 29.2%, Apple 28.7%, Google 28.4%, Cisco 27.5%, Netflix 21.8%, and so on.
randallsquared 5y ago
All those can help for some types of business. But as we've seen from the supply-chain disruptions since the start of the pandemic, there's also a cost of cutting things close. You can choose whether to typically err on the side of too much or too little, and you can do things that lower the likely size and probability of the error, but you can't just decide not to ever get it wrong, and getting it wrong will cost money.
nradov 5y ago
That doesn't actually work very well for shoes and apparel. Demand is hard to forecast due to changing consumer tastes, and lead times are too long to adjust orders up or down quickly.

smhost 5y ago

Why is it so inefficient?

randallsquared 5y ago
Maybe it only looks inefficient because we're comparing against a fantasy economy where nothing bad happens and no losses have to be recouped. :)
- lotsofpulp 5y ago
  Just like the fantasy that these companies that outsource are earning giant profits, when a look at their 10-Ks shows pretty average profit margins for a business that wants to stay in business.

ralfd 5y ago

Sure, but why does the cost quadruple? If a china shoe costs 15 dollar less to make, why doesn’t it stay 15 dollars at the price the consumer sees?

tomnipotent 5y ago
It costs money to sell shoes. You have duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots. And if you're manufacturing original designs, you also have a year-long lead process, manufacturing obligations and scheduling, sample management, maybe even material procurement. The cost of the shoe ends up only being a third of overall costs. I'm also not going to sell everything, but I still need to keep buying inventory to keep the machine going. If I don't sell the product at least 3x what I paid for it, there's no way I can maintain sufficient capital to keep a business running and hedge against risks.
- NickNameNick 5y ago
  Of the costs you list: > duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots Only the Duties automatically scale with inventory cost. like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
  - icegreentea2 5y ago
    One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
    - Dylan16807 5y ago
      Yes, a component. But it shouldn't be roughly the entire cost that scales that way.