.st0{display:none;fill:#936037;} .st1{fill:#936037;} «Money in the fridge»: what happens to the company when production goes to the warehouse Read more

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Friends, hello everyone! Ilya is in touch, and today I want to touch on such a hackneyed and, nevertheless, such a sentimental topic as warehouse residues.

The topic is indeed very popular: more than one book has been written in the world literature on economics. When I was a financial analyst, when evaluating a trading or manufacturing company, there were about 5 mandatory metrics only in terms of stocks, with the help of which the company’s success was determined. Among them were several calculations of inventory turnover, assessment of their liquidity and the share of reserves in the company’s assets.

Co-founder of «Shipyard» Ilya Goldin

But I want to look at it from a more human point of view. From the point of view of real production: how inventory affects the life of the company.

So let’s go!

Trade vs Manufacturing

In trading, the reasons for the formation of stocks are clear — reality (sales) met with dreams (plans), and reality won. The season is over, you have a lot of goods, and the only way out of the situation is discounts.

My recommendation is to negotiate with production in small batches for more flexibility, even at the expense of price, but the terms should be shorter. It makes no sense to place an order for six months at the beginning of the season.

For example, my friends from a St. Petersburg clothing brand order down jackets at the factory by November, a deeply seasonal product. To get a good price, they make a big order. As a result, for the third year already, I see that by February the guys have a bunch of down jackets in models and sizes that are unpopular this year, and the leaders of the season leave in two weeks.

If you calculate, then such planning simply leads to wild losses. First, from lost profits (we didn’t sell a lot of top models). The second is from the sale at the end of the season, when down jackets go 50% off. And not everything is sold yet, but the money is frozen for a year.

Cutting room work

Why not place an order, say, not for six months, but for a shorter period, in a smaller batch, but pay 10% more? In fact, as a result, we will get pure win-win: the seller sells much more down jackets, because he has popular models in stock, and he will sell them at full price. And at the end of the season, he will have no frozen money left. Production sells products at a higher price and will be able to plan their production capacities more flexibly.

But we can’t do that. Why? That’s right — because we ourselves, first of all, production, and only in the second trade.

Why do inventories form in production?

This dilemma is familiar to any manufacturer. What to do if there are no orders? There are people, there are capacities — we need to produce. And everything is made in stock. If people work on piecework wages, we can say that there are fewer problems: do not produce, and there will be no wage costs, and you will not have to buy materials. But, most likely, the employees will quickly scatter and, when the order appears, they will not be collected back.

However, this is not entirely suitable for the “Shipyard”. First, we have a salary, not a deal. And, secondly, people are our main value, and even in quarantine we paid wages when production was not working.

Therefore, when demand drops, work on the warehouse usually begins. What can be done about it? Do not work in the warehouse!

Stocks of materials

The first thing to do is to make production more flexible. Here we recall Toyota, lean manufacturing and the concept of just-in-time work. As a matter of fact, everything is the same as in my offer with trade. We produce in small batches and only what is needed.

Let’s start with stocks of materials. Consider our largest cost item — leather.

Our biggest cost item

We have a framework agreement with leather suppliers that we choose a certain volume for the year, but they have an obligation to always keep the minimum balance of our leather in their warehouse for us. For color, this residue is 50 thousand dm. In fact, it’s not much. And we spend this amount in 30-50 days (this, by the way, is the period of leather production). But we never buy the entire volume, but make small orders of 10-15 thousand dm3.

Yes, we overpay for transportation every time. Plus, we risk that the delivery may be delayed, but the savings are huge. For example, in our company we use 11 types of leather: they have different prices, but let’s take the average price of leather — 15 rubles. for dm.

Ordinary company: 50,000 (dm) X 11 (types of leather) X 15 (value) = 8,250,000 rubles.

“Shipyard”: 10,000 (dm) X 11 (types of leather) X 15 (cost) = 1,650,000 rubles. We have an overpayment of about 30-40 thousand rubles. per month for delivery and a small risk of underdelivery.

When colleagues or leather suppliers come to our production, they are always surprised how little leather we have in stock. But such a simple move frees up a lot of resources.

Embossing on leather

With other materials, everything is about the same. The only exception is supplies from China. There, the difference in transportation is more critical, but we still carry everything either by plane or by truck (10-21 days), overpaying for it 2 times than by sea (45-60 days). In fairness, the volumes from China are not so critical yet, but at some point (it must be considered) the sea may become more profitable.

Interesting, by the way, the case of Zara. She always delivers all her clothes to stores by plane. This is simply amazing for a company of this size. But for them, the turnover rate is the main criterion. And while Gap or H&M takes 2 months to transport a new collection to a store in Texas by sea, Zara renews the assortment in a nearby store 11 times a year, bringing it by plane in 4 days from a production site located anywhere in the world.

With stocks clear, let’s move on to stocks of finished products.

Stocks of finished goods

During my time in banking and in business, I have seen dozens and hundreds of bankruptcies. Most of them happen to companies with huge inventories that “eat up” all liquidity.

So let’s start with the basics:

In the company «Shipyard» the nomenclature consists of 210 items.

We produce 6000 items per month.

Let’s take the average cost of a product of 2000 rubles.

If we want to have a stock of 10 units. for each position, then by simple calculations we get that for the presence of such a stock we need 210 (positions) X 10 (stock per position) X 2000 (cost) = 4,200,000 rubles.

If we want to have 10 more units. in a semi-finished product, then in fact we must multiply this figure by 2 (we take the stock not 10, but 20), and we get 8,400,000 rubles.

And now let’s introduce another introductory. The production produces 6000 items per month.

Let’s build the following plate (sales and production figures are unrealistic, since they are not linear).

How much money will be «frozen»

A drop in demand in the off season is a reality. And, as we can see, the value of inventory increases exponentially. And here the production has several options for development.


• Increase sales (we will talk about this in detail in the next article)

• Optimistically hoping for a season in which everything is sold out.


• Stop production and here is an interesting economy. Even if demand recovers to the level of production (not higher), then it will turn out that you will have an excess stock balance in the amount of 4,000 items in the amount of 8 million rubles. And this excess will become permanent. (We do not take into account the tendency to go out of fashion or out of date inherent in some areas).

Let’s calculate the cost of these 8 million rubles. We will not calculate WACC, but simply take the cost of borrowed capital at 15% and it turns out that these 8 million rubles. will cost 1.2 million rubles. in year. Let’s add the possible losses of these balances, plus the possible losses during the sale (discounts). And we will get the cost of stocks slightly higher than the actual.

Now one of the largest St. Petersburg production of leather goods has been heavily reduced. We were in their warehouse, where the average term of stocks was 3 years, so consider their cost. But this is usually not very relevant for small businesses. More importantly, these 8 million rubles. you just have to take it and pay. Not really knowing when they will be able to return.

And the second option is to simply stop production. Even if the salaries are half (4 million rubles), and you decide to pay it in full, then you will save 4 million rubles at the moment. And don’t get possible illiquid stock to the warehouse (I don’t take into account storage costs yet).

Such a decision is incredibly difficult to make, because any entrepreneur lives with faith in a bright future, when demand returns and everything will be as good as before. But it is desirable to have a foundation under this hope.

Despite the fact that there are not many options, I look at such moments with a positive. We at “Verf” twice encountered an excess of products in the warehouse. And both times these issues were resolved by additional development, and not by reduction. I will tell you in detail about our cases and other possible ways of development in the future.


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