Overstocking is an unforced error

A while back we launched a product we thought would be a hit out of the gate. We ordered what we figured was 90 days of inventory. It turned out to be about 18 months' worth.

Once you're sitting on that much product, you've only got two ways out. You can discount it to move faster, or you can hold your margin and sell through it slowly. Either way your cash is stuck. We're bootstrapped, so money sitting in a warehouse is money that can't buy ads or fund the next product.

We let it sit and sold through slowly. Discounting our way out would have cost us twice, because you give up margin on every unit and you teach your customers to wait for the next sale. I've written about what that does to the value of your revenue.

The miss in the other direction

We've had the opposite happen too. There was a product we expected to be a slow mover, and we knew from the first email we sent that we had it backwards. We kept going out of stock.

That miss cost us too. It just cost us a lot less, and the product was pulling revenue the whole time. Put the two misses side by side and it isn't close, and that's the part most teams get wrong when they build a forecast. The cost of guessing high and the cost of guessing low are nowhere near the same size.

A stockout also ends on its own. You sell out, you annoy some customers, you leave a few weeks of revenue on the table, and then it's over. I've said before that under-ordering is almost always better than over-ordering, and this is why.

Where overordering comes from

There are enough real problems in a business already without creating your own. I call the self-created ones unforced errors, and overordering might be the most common one I see.

It usually comes from one of two places. Either you're attached to the product you built, so the number reflects the launch you want instead of the demand you can see, or it's a last ditch effort, a big buy on a new product that's supposed to cover a revenue hole somewhere else. Neither of those is demand.

Who owns the number

Both of those get into the number when one person owns it. At our company the forecast is a shared number, and I think that's how it should be. The front end of the business usually overestimates, the back end underestimates, and the real number is somewhere in the middle. Getting there is a negotiation. I've written about that meeting and why everyone walks into it wanting a different number.

If you're founder-led, the founder should be the one signing off on the buy, because it's their cash sitting on the shelf.

Review monthly, don't revise

We build the forecast once a year and review it monthly, and we try hard not to revise it in between. That sounds backwards until you think about what the forecast is for. The gap between what you predicted and what really happened is the most useful data the document produces. Keep the original number all year and you can see exactly how you miss, which categories you dream on and which ones you sandbag. If you revise every month, next year's exercise starts from scratch.

Don't forecast what you need

As we've gotten bigger, it's harder not to let the cash requirements of the business drive the forecast instead of what we actually think will happen. The business needs budgets, hiring, a cash plan, and all of them want a bigger number. A forecast built to cover what you need stops being a prediction of what customers will do.

So we run it in the other direction. Actuals and current trajectory set the budgets, the hiring, and the cash plan, and the forecast decides the buy. That's it. DTC gives you enough flexibility to run that way, and it's volatile enough that you'll want to. If you're a heavier retail business, you might need to do it differently, and that's fine. Part of the job is understanding the business you're in and doing the right things for that business.

We sold through that first buy eventually, at full margin, and we'd make the same call again. We still miss forecasts. Everyone does. You just want to miss in the direction you can recover from.

If you plan your inventory differently, reply and tell me why.