First Loss is Best Loss

I had an accountant who used to say, “First loss is best loss.”

This was his warning not to make too much finished inventory.

In an assembly or manufacturing business, the bulk of inventory includes raw materials, work in progress or WIP and finished inventory.

Let’s say you have orders for 1,000 pairs of jeans, each using 1.5 yards of denim fabric which is a total of 1,500 yards of denim.

But, to get the particular denim you like, you have to buy 2,000 yards of fabric.

Many parts manufacturers including textile companies have minimum order quantities (MOQs).

That gives you an extra 333 pairs of jeans.

You reason that perhaps you can find a new customer or one of your existing customers will reorder.

Do you make them?

No.

Because to make 333 additional pairs, you have to pay the sewers, you have to buy labels, zippers, snaps, thread, etc., you have to perhaps dye them or wash them. There’s a lot of extra expense that goes into making your jeans.

Assume the total cost of all those things is $50 per pair.

So if you make the extra 333 pairs of jeans, it will cost you $50 plus 1.5 yards times the cost of your denim which we’ll…