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?
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 assume is $15.00 a yard.
That’s a total of $75.00 per pair of jeans.
If your customers reorder 33 pairs you are left with 300 pairs, (a more likely scenario than getting new customers).
Three hundred pairs times $75 per pair is a the cost that you’ve sunk into those jeans. That’s equal to $22,500.
Closeout prices are somewhere in the neighborhood of fifty cents on the dollar.
If you closeout the fabric, you lose about $2,500.00 — (333 yards x $15.00/yard x .5).
If you close out the finished jeans you will lose $11,250 — ($22,500 x .5).
The 33 pairs that were reordered don’t come close to covering that loss.
First loss is best loss. And the truth is in the numbers.