In this episode of the Ecomm Breakthrough podcast, host Josh Hadley tackles what he calls the “silent killer” of e-commerce businesses: inventory mismanagement. Drawing on his experience scaling brands to eight figures, Josh explains how poor inventory forecasting, ordering too much or too little, can devastate cash flow and lead to bankruptcy. He shares cautionary examples, practical frameworks, and key strategies, including SKU-level forecasting, maintaining 90-120 days of inventory, using pre-orders to validate demand, and having liquidation plans ready. Josh emphasizes that protecting cash flow is ultimately more critical than maintaining perfect stock availability.

Bullet Points:

Timestamps:

00:00:00 Introduction: The Silent Killer of E-commerce
The host introduces the number one reason e-commerce brands fail and go bankrupt, which he calls the “silent killer.”

00:00:54 Inventory: The Kryptonite of E-commerce
Inventory is compared to Superman’s Kryptonite, a silent threat that drains a business’s power and can sneak up unexpectedly.

00:02:00 The Dangers of Inventory Forecasting
The host explains that inventory forecasting is never 100% accurate and discusses the asymmetrical risks of ordering too much versus too little.

00:04:48 The Compounding Problems of Overstocking
Over-ordering inventory creates a chain reaction of problems, including cash flow issues, debt, compressed margins, and increased storage costs.

00:08:01 The Manageable Downsides of Understocking
Ordering too little inventory has downsides like lost sales, but also upsides like liquid cash and the opportunity to raise prices.

00:10:53 Case Study: The Thrasio Bankruptcy
The host uses the Amazon aggregator Thrasio as an example of how poor inventory processes can lead a major company to bankruptcy.

00:12:55 Key Lessons from Thrasio’s Failure
Lessons include not assuming demand spikes are permanent and the critical importance of forecasting at the individual SKU level.

00:14:51 Four Major Inventory Rules
The host shares four core rules for inventory management, including when to kill SKUs and targeting 90-120 days of inventory.

00:15:46 Understanding Inventory Turnover Ratio
A healthy inventory turnover ratio is explained, with a target of 4-6, depending on manufacturer lead times and supply chain.

00:17:43 Managing Highly Seasonal Products
A strategy for seasonal products is to under-forecast and plan to sell out just after the peak demand week.

00:21:21 Forecasting for Trendy Products
For products based on trends, designs, or sayings, it’s wise to forecast a 20% decline in sales year-over-year.

00:23:07 The Importance of a Liquidation Plan
Brands should build a liquidation plan and establish relationships with partners before they ever face an urgent need to sell excess stock.

00:24:09 Managing Inventory for Product Launches
The risks of being overly optimistic with new product launches and the importance of placing smaller initial test orders are discussed.

00:27:04 The Pre-Order Page Strategy
Using pre-order pages on Shopify is presented as a key strategy to gauge demand and improve cash flow significantly.

00:29:00 Improving Your Cash Conversion Cycle
The host emphasizes how pre-orders can create a negative cash conversion cycle, which is the key to scaling infinitely.

00:31:04 Summary: 10 Key Takeaways for Inventory Management
A distilled summary of the top ten rules and frameworks for effective inventory management to protect your business and cash flow.

00:34:04The Ultimate Goal: Distributable Cash
The primary metric for a business owner should be distributable cash, which indicates a healthy, profitable, and sustainable operation.

Links and Mentions:

Tools and Websites
“Shopify“: “00:27:00”
“TikTok“: “00:23:07”
“Cash Conversion Cycle Podcast“: “00:30:06”

Key Concepts and Strategies
“Pre-order Pages”: “00:27:04”
“Liquidation Plan”: “00:23:07”
“SKU Level Forecasting”: “00:31:04”
“Inventory Turnover Ratio”: “00:16:48”

Important Metrics
“Distributable Cash“: “00:34:04”

Recommendations
“Download Slides”: “00:35:00”

Transcript:

Josh Hadley 00:00:00  Today I’m going to be talking about the silent killer that kills e-commerce brands when an e-commerce brand goes to die. This is primarily the number one reason as to why they go extinct, and why they potentially even go bankrupt. Today, I’m going to be diving into what that silent killer is and how to defend against it so that it doesn’t become the silent killer for your business. Welcome to the Econ Breakthrough podcast. I’m Josh Hadley. I’ve scaled my own ecommerce brand from 0 to 8 figures, and I’m actively building towards nine figures in sales. This podcast is where I document that journey and share the systems, the strategies, and the lessons learned in real time so that you can learn what actually matters and scale your own business. Who am I? My name is Josh Hadley. First and foremost, I’m a man of faith. I’m a husband to a beautiful wife and a father of four children. I’ve been selling in the e-commerce space for over a decade, doing over $20 million in annual revenue and selling multi-millionaires on Amazon, Shopify and TikTok shop.

Josh Hadley 00:00:54  And I am also the host of the number one business strategy podcast for ecommerce entrepreneurs, E-comm Breakthrough. Those of you who watched either the movie or read the comics of Superman recall that Kryptonite was the one thing that could bring Superman to his knees. He almost had invincible power, but when it came to Kryptonite, it was made him almost powerless. It didn’t kill him outright. It slowly drained every power that he had. He couldn’t fly. He couldn’t use his strength. He couldn’t see through walls or outrun a bullet. But he was still breathing. Still alive, but completely powerless. The most dangerous part is that he genuinely never saw it coming until it was too late. So how does that apply to business? And what is this silent killer that is the Kryptonite of ecommerce brands. Well, that is inventory. Inventory truly is e-commerce Kryptonite because it is the most dangerous aspect of scaling your business, because it is one of those things that can sneak up on you. And before it’s too late, you have already put yourself in a really bad position and effectively made your brand powerless.

Josh Hadley 00:02:00  So if we understand that inventory is the Kryptonite for ecommerce brands, what are we supposed to do about that? How do we defend against it? And how do we make sure that it does not become the true Kryptonite that makes us powerless in our brands? Today I’m going to be sharing with you the decision rules, the frameworks that I use in my own brand. After selling in the e-commerce space for over a decade, I have made numerous mistakes when it comes to inventory. Whether it’s ordering too little inventory or ordering, way too much inventory, and some of the penalties and the punishments that come from that, I’m going to be sharing those examples with you, and I’m going to be sharing with you the exact rules that we’ve implemented into our own business, so that you can learn from those mistakes and not make the same mistakes that I’ve made over and over again. As we dive into these rules, one of the most important things I want you to know is that guess what? When it comes to inventory forecasting, you will be wrong 100% of the time.

Josh Hadley 00:02:53  I can guarantee you that this is one of the most, like Almost impossible jobs that somebody can be responsible for for an e-commerce brand, because you are always going to be wrong. You’re going to either have too much inventory or too little inventory. Maybe it’s a 0.001% chance that you hit the nail right on the head. And it was exactly perfect, especially when you’re dealing with like seasonal products or things like that. But this is something that we are always striving for and always trying to work towards. So let’s talk about this. The risk with inventory is not symmetrical. And that’s the important call out that I want you to like take away from this. If you order too little inventory, yes, you might lose some temporary sales. Yes, you might run out of stock. Yes, you are going to lose some, maybe ranking on Amazon or some other ranking factors on other marketplaces that you’re a part of. Yes, there are some downsides there, but on the flip side, you can increase your prices.

Josh Hadley 00:03:51  You can increase the margin that you’re getting. You could even start pre selling a product while you’re waiting for it to come from your manufacturer, thereby increasing your overall cash flow. So, like on the two little inventory stage, there are some downsides. But guess what? There’s actually some upsides to it. What happens when we order too much inventory? Well, it’s only downsides. Cash is going to be trapped. You might have to borrow money to actually fund the overhead for the business and just keep the business functioning. You’re going to start incurring extra inventory costs and storage costs. And heaven forbid you actually have aged inventory in Amazon where you’re paying the aged inventory surcharge or those eyes fees. Okay, margins start compressing because you’re trying to liquidate the inventory. At the end of the day, this is where businesses go to die is when you over forecast your inventory and you lock yourselves up and basically locking all of your cash up. That makes you powerless in your business and put you in a really, really difficult spot.

Josh Hadley 00:04:48  That is the number one reason why e-commerce brands go bankrupt. It’s because they’ve ordered way too much inventory. Let’s talk a little bit more about like what happens when you order too much inventory, or whether you’re maybe a little more bullish on your forecast. One overly aggressive forecast does not just create one problem for one season or one temporary thing. Here’s what happens. It’s going to create a chain reaction that just continues to compound. And it’s really difficult to recover from and sometimes can take years to recover from something like this. Whereas going to short on inventory, you can recover in a matter of months. Over forecasting, you’re recovering over the course of years. Let’s talk about it. Number one, your cash is locked up on inventory sitting in somebody’s warehouse. That means you don’t have cash in your business. What happens when you don’t have cash in your business? You begin to take out lines of credit, or taking on external funding or debt to be able to fund the operations. And guess what? When you take on debt, now, you have a debt load that you have to service, and that is only going to increase your overhead.

Josh Hadley 00:05:53  So now you are just compounding your issues in a major way. That is one of the biggest punishments out of everything is if you have to tap into a line of credit, this becomes one of the most expensive and sometimes irreversible consequences in your business. Number three, you now have to begin probably discounting your product in order to increase its sell through just so that you can, you know, improve cash and get more cash coming into the business. Well, guess what happens when you have to discount you’re compressing your margins. So what, you originally thought you were going to profit from that original POA now gets compressed. Now you’re making less. So guess what happens. You’ve also taken out a loan, so now your margin just becomes extremely tight and small. Number four your storage costs increase. So ongoing warehouse fees, your aged inventory surcharges on different marketplaces. If you let it sit on their shelves for too long. Amazon’s done a great job of this as of late, in terms of ratcheting up their fees to punish sellers, that they’re basically saying, like, you’ve got to get extremely good at forecasting your inventory before you ever send it into our warehouse, because if you don’t, we’re going to severely punish you.

Josh Hadley 00:07:03  If that sits in our warehouse for more than 180 days. Next. Number five, you have less money to spend on ads. So this is going to perpetuate a cycle here because you have less money to spend on ads. Now your sell through rate might be impacted and you’re trying to increase your sell through rate by discounting. So now guess what. You’ve got a whole host of issues. This begins a chain reaction that can become the spiral downward if you are not careful. And so ultimately the biggest concern that I see is sometimes when people don’t have enough, you know, processes in their business and then they just continue to repeat those orders even when they already have too much inventory. That is where the death knell of business starts. And that’s where most e-commerce brands go bankrupt is because somebody just kept placing reorder, reorder, reorder when they already had too much inventory. They were already discounting. They already took out a line of credit and the bleeding just never stopped. And literally they they bled out of cash.

Josh Hadley 00:08:01  What happens on the reverse side? Let’s talk about what happens when you order too little inventory number one okay. Well on the downside you lose sales. You have some stock outs okay. That might happen over a period of a few weeks to maybe a couple of months okay. Customers might go to other competitors. And so now your competitors pick up some market share. You miss some revenue maybe during your peak season because you forecasted too little inventory. You know, there’s maybe some potential damage to your ranking on Amazon, your best seller ranking. Okay. Like there are things to factor into this. Okay. But are those things manageable? I would argue yes. And in addition to that, there’s a lot bigger upsides. Number one, your cash stays liquid and available if you’ve ordered too little inventory. Well good news is you still have cash sitting in the bank as long as you’re a profitable e-commerce business. Number two, you don’t have a bunch of storage costs that are accumulating. So good news is your warehousing costs are going to be lesser.

Josh Hadley 00:08:59  Number three, you don’t have to worry about forced discounting and margin compression. On the flip side, guess what you’re able to do. You’re able to increase your prices. And hopefully by increasing your prices you’re raising your profit margin. And you’re maybe. Here’s the interesting test. And I’ve seen this a number of times. We raise the price because we’re about to go out of stock, but the sell through remains the same. And I’m like, oh you idiot. Like, why did we not try raising our prices earlier? Because now I’ve been missing out on lots of margins. So there’s just like so many benefits, I think, that come out of like under forecasting inventory. And then it forces me to have to test raising my prices. And then there’s been like 50% of the time the sell through rate remains the same. And I’m like, sweet. When we come back into stock, our new floor is this price that we went out of stock on because we saw the sell through was happening there.

Josh Hadley 00:09:49  Okay. And guess what? If I also am ordering too little inventory? Okay. I have the flexibility to pivot if trends shift. So maybe a particular product I ordered to little inventory, but it already wasn’t doing great and it was kind of underperforming expectations anyways to begin with. Well, good. I have the flexibility to just like kill it rather than always being bullish and optimistic and ordering too much inventory. So the key takeaway here is running out of stock is painful, but it is survivable. Whereas over stocking yourself can be an existential threat to your business. Let’s dive into a specific example here. My favorite example is thoracic. So everybody knows thoracic is like one of the biggest Amazon aggregators. They were the hot girl at the dance. In 2020, 2021 felt like any Amazon conference that you went to during that time period, Amazon or thoracica was actually throwing like these massive parties, trying to get sellers to sell their businesses to them. And then we ultimately know Thracian went bankrupt. They went out of business.

Josh Hadley 00:10:53  Okay. Not great. And why is that? Well, number one, they had very, very bad operating processes within their business. And inventory eventually became their Kryptonite because they did not have good processes and they weren’t good operators in place. What ultimately happen is their supply chain team, whoever was ordering, they just continued to click the reorder button based on, hey, what happened over the last 30 days? Hey, what happened over the last 90 days? And so what happened during Covid, as everybody knows, like impressions and sales shot through the roof for very specific product categories. And guess what? If you are forecasting your future demand off of what just happened when we had like almost ten years of of demand, pent up demand like merged at the moment of Covid and accelerated e-commerce ten years into the future. Well guess what? They then ordered so much inventory to where they had 5 to 10 years worth of inventory for specific SKUs. In addition to that, they were making decisions at parent level categories.

Josh Hadley 00:11:56  And so what happened is like, oh, I’m selling these, let’s call them mugs or something like that. They’re selling mugs. They have ten different color variations for them. They just looked at the parent skew and said, oh, the black one. Good, good grief. We sold 10,000 units last month, so we need to order 10,000 units or forecast 10,000 units per month, not only for the black skew, but also for the ten other color variations. And in reality, maybe it was the orange variation that was only selling 100 units a month, and the green one was only selling 300 units a month. And they just like because there was no skew level optimization or, you know, prioritization for the reorders and forecast, they made these blanket purchase Pos across the parent category and ultimately left them saddled with 5 to 10 years worth of inventory. Ask me how I know because I’ve had lots of conversations with the with the business owners that sold to Casio, and they watch them basically run their business into the ground and watched how much inventory they began accumulating on those balance sheets.

Josh Hadley 00:12:55  So what are the lessons to be learned here? Number one, do not assume that a temporary demand spike is the new permanent baseline. Number two, do not place blanket purchase orders simply because the overall product line is growing. And third and last but not least, you need to be forecasting and purchase at the skew level, not at the parent category level. Every variation needs its own forecast and purchase order planning. Those are the key takeaways. And last but not least, you got to make sure that your operations are locked down. If this is. This is one area of the business like you’re playing with fire. If you are just shooting from the hip every week and you’re just like, I think I’m going to forecast this or I’m going to do that, or heaven forbid you have like an AI agent that you think is managing this and you don’t have the right checks and balances in place, like you could have your AI agent ultimately like run your business off a cliff if you don’t have the right checks and balances in place here.

Josh Hadley 00:13:52  So guess what? I’m going to put one of my best team members on this, because I know this is the Kryptonite to my business. If I do wrong here in way over forecast on my inventory, this could be the death knell to my business. So with that, that’s my word of caution to you, is make sure you have some of the smartest people on your team working on this. They should always be enhancing improving the processes over and over. And that’s essentially what we’ve done. Our playbook just gets better and better every year that we stay in business. Let’s talk about four major inventory rules that I’ve learned over the past decade that I want to share with you here, to give you just like a broad framework. And again, is this going to apply to every single e-commerce brand, know every e-commerce brand has a lot of different nuances. You have different seasonality, you have different product types, you have subscription. There’s a lot of things that go into this, but here are some overarching principles and frameworks that you could at least use to build your own SOPs and customize them for your own business.

Josh Hadley 00:14:51  What are the metrics that we use to ultimately kill SKUs? Here’s what we do for our business. Number one, if a SKU has a certain MOC, let’s call it a thousand units. If it’s a thousand units, as my MOC and I cannot sell those 1000 units in a 12 month period of time, that skew immediately gets killed. Now, we always like there can always be exceptions to the rule. If it’s like a core product and maybe like we’re trying to resurrect it from the dead. Okay. Like there might be some exceptions to the rule, but if you have hundreds of products like this is where you just have to get ruthless and just say like, yep, I know I’m going to have some losers in there. But these are the rules to where my team knows that we just like we’re killing the product and it’s time for us to move on. Number two, we only use skew level decisions only we never place blanket orders at the parent level. Every purchasing decision is made on a skew by skew basis, and every skew has its own seasonality, forecast and demand plan for it.

Josh Hadley 00:15:46  Okay, we are always targeting about 90 to 120 days of inventory on hand. That’s kind of like what we’re what we shoot for in order to, you know, there’s always going to be some viral spikes that we have happening for a product. And that’s how we’ve been able to manage this. The last thing that I want to call out here is the inventory turnover ratio. So a healthy a very healthy inventory turnover ratio for an e-commerce business is 4 to 6. That means you are purchasing your products like let’s say if your inventory turnover ratio is four. That means over the course of the year you have placed four Pos and you have sold through all four of those Pos in that year. That would lead to an inventory turnover ratio of four. Now, if you’re placing six Pos and you sell through all of them, that’s an inventory turnover ratio of six. Now, if you have a manufacturer that is especially if they’re here in the US and you have low lead times, that’s where you could get inventory turnover ratios that cross ten, 12, maybe even up to 20.

Josh Hadley 00:16:48  Because like you have such a short lead time, you’re just constantly placing pots dripping it into the business. Right. The higher your inventory turnover ratio is most likely the higher your cash conversion cycle is. And that means you have greater ability to adapt in your business wherever the trends take you. Now, on the flip side, if you have an overseas manufacturer and it’s got to sit on the water for at least 60 days, okay, and then your manufacturer can produce the product, let’s call it 30 days, like you’re already at kind of like the best case scenario inventory turnover ratio of four because that’s 90 days. So essentially you would be placing an order every 90 days and replenishing that selling through it. That would be the ideal. So just know that there’s a lot of nuance that comes from this. Again, I’m giving you the gold standard of like 4 to 6 as a really, really good inventory turnover ratio. But it all is very dependent on who your manufacturer is, your supply chain, and the different constraints that sit within your business.

Josh Hadley 00:17:43  Let’s talk about another really important lesson learned here, especially because we have sold into like seasonal product categories. So in many of you I think like in general for a lot of e-commerce entrepreneurs, we all have a component of seasonality in our business. And I like to kind of like separate this out. There are products that are explicitly like seasonal, like let’s take for example, a Christmas card. So if you’re going to send like a Christmas card, it’s like a greeting card to somebody like that, like, are you buying those in the month of March or April? No. Like you’re not sending somebody a Christmas greeting card in the springtime. You’re not doing that in the summer. Okay. So what you have here is you have an aggressive cliff for your seasonality. So what does that look like? Well, if you’re selling a Christmas card, like once it gets to probably, you know, the 20th of December, Your revenue or the sales and search volume, just like falls off a cliff, like almost goes to zero.

Josh Hadley 00:18:37  And then after that, like even after the season, like it’s just minimal, minimal search volume. That’s the type of seasonality that I’m referring to. So what’s our approach to overall seasonality? And if you’re selling in a very highly seasonal product category, how do you want to approach this? Number one, I’m always going to under forecast my inventory. So does that mean I’m going to miss out on sales during a seasonal period of time? Yeah. Like let’s go back to a Christmas card example. Typically those Christmas cards would start picking up sales in a significant way on November 1st, and they’re basically going to die on December 20th. Okay. If that’s the case, I’ve got maybe seven weeks worth of like decent sales to forecast my inventory for. So if I’ve got seven weeks, what I am going to do is I know basically week number four is going to be my peak week, right? Where sales on week one are starting to slowly ramp up by the time I get to week four. It’s kind of like peak holiday demand.

Josh Hadley 00:19:33  People have planned they know they need to get their Christmas cards out from weeks five, six, seven. I know it’s just going to get lower and lower and lower. And then week eight, it’s basically like almost non-existent. So what do I do here? I’m trying to sell out at the very beginning of week number five. So if I’ve got seven weeks to sell through a particular product that’s highly seasonal, I’m going to forecast my inventory to sell out at the beginning of week number five. And here’s what happens if I’m over, if I’m outpacing the demand that I initially forecasted, guess what I’m going to do? I’m going to raise prices. I’m going to walk away from that season with a very healthy profit. And I’m going to say, darn it, I wish I would have had an extra few thousand units because I would have been able to capture more demand. But good news is, I went out of stock the fifth week of the season. I missed out on a couple weeks of sales, but I actually made all of that up because I, I was able to almost double the price of my product.

Josh Hadley 00:20:25  Okay, so that’s why I’m going to under forecast. If I over forecast, I’m like, I’m going to try to hit this exactly right so that we walk out of, you know, the Christmas season, which is the maximum amount of profit. Guess what happens if you’re slightly under forecasted. Then you’re like, oh crap. we’re going to have excess inventory. I don’t want to have I’s fees because like this product is not going to sell for another year. I don’t want to have to liquidate it. That’s going to be expensive. Okay. So I’m just going to start discounting. So then the profit you thought you were going to make gets smaller and smaller. And then guess what. What if you actually don’t sell through how much you made. Now you’ve got a whole host of issues as we talked about previously. So that’s the approach to seasonal forecasting. Planning to run out of stock. The next thing that I want to share with you is what do you do with products that are gift able, maybe their apparel or decor or their kind of like trendy sayings on a t shirt or something like that? Well, here’s what we’ve seen.

Josh Hadley 00:21:21  Just because one saying is very trendy this year, let’s talk. Let’s talk about Christmas again. So I’ve got a very popular saying it’s like a a Christmas gift that maybe people could be giving. It’s very popular, saying, I throw it on a t shirt and then I’m like, Holy cow, we sold 20,000 units in this Christmas season. Great. When it comes time to plan inventory for that product again, most likely that saying is probably not going to be as high of demand as it was that last season. Because like when you’re following these like trends and niches and designs and colors, like things just change and evolve. I look at, you know, houses now it feels like everybody wants to have a white House, it seems like. Right. And then I know 20 years from now we’re going to look at that. And everybody has this white House and it’s like, that’s so ugly. Like we’re all going to do that. But like you just notice over time trends change. So what do you do with that? Okay.

Josh Hadley 00:22:12  If you have a product that’s built off of a trend or color or design or theme or saying or something like that, we’re going to forecast like a 20% reduction in sales year over year over year because we know that like in order to stay relevant in. Like trends and themes and categories, you essentially just have to launch new products year after year after year, trying to guess what the next new saying or the next new design or color is going to be the next best hit. Like, you’ve just got a test. And so with that, you’ve got to instead of saying, hey, we’re up 10% year over year, you should be like, we’re only up 10% year over year because the the new products or the new designs are beating the older ones. That’s the way you have to approach that. One of the other key aspects to managing this Kryptonite in an e-commerce business is building a liquidation plan before you ever need one, so know the sales channels that you can sell through in order to liquidate products.

Josh Hadley 00:23:07  There’s been a number of times where we’ve actually been able to utilize TikTok as a great liquidation channel for a product that like, we’re ready to just kind of like get rid of. Another thing that you can do if if you have a Shopify site, right, is begin adding that product as an added bonus or a buy one get one type of promotion and be able to get rid of your inventory while giving your customers a more enhanced experience and enhanced value. So understand what your liquidation plan is. Maybe you have retail partners, maybe you have. There’s actual liquidators that are out there that you can sell to begin building those contacts now before you need them. And when it is a dire and urgent situation and you do need cash, basically like this is your ripcord. Always have an exit plan. Know who your partner is and prioritize your cash recovery. It might be disappointing to get, you know, 10 or $0.20 on the dollar that you actually invested, but it’s better to just kind of like, move on, take your losses, learn that lesson, and make sure that you under forecast your inventory moving forward.

Josh Hadley 00:24:09  Now, one of the key places where I see most entrepreneurs and brand owners get caught up in inventory and where things get really sticky is when they’re very optimistic and very bullish about product launches. This is one of those places where if you don’t watch out, you can really get yourself into a sticky situation, especially if you have had a kind of a good track record the last six months. Every product that you’ve launched, you’ve just crushed it. And so you make a bigger bet on your next product launch. But maybe that’s the one that fails. And when that fails, it fails in a meaningful way. Especially if you’re starting to, you know, put 100 K behind each of these launches, and then you’re going to essentially lock up 100 K in inventory before you even know if that’s going to sell. And if it doesn’t sell, then you’re going to be in trouble. That’s the reason why it’s so important. One of the key metrics that we look at is like, what’s our hit rate? What’s our success rate with product launches? Are we at, hey, 60% of our launches go according to plan and beat the expectations that we originally set out for? Or is it higher or is it lower? You need to factor that in to your overall supply chain planning.

Josh Hadley 00:25:15  Otherwise you’re just shooting from the hip. In addition to that, the right approach here is placing initial smaller orders. So how do you do that? You’ve got to work with your manufacturer. Get some test bets. Another one of my favorite ways to do this is, you know, if you’re on Shopify. Start creating some pre-order pages. We’ll talk about that strategy in a little more detail. But like, here’s the thing we’ve done this time and time again, we still will take a bet on a product. And to me, in the past it was like, wow, we ordered 10,000 units. And then I realize, oh crap, these 10,000 units are only going to last me 30 days. Shoot, I should have ordered 50 60,000 units to begin with, but I know that if I’m wrong on those 50 60,000 units, that’s actually going to set me back further than me being wrong and saying, oh, actually, this this was a smashing hit. Dang it, I’m out of stock in 30 days.

Josh Hadley 00:26:05  I can recover from that in a lot faster manner than I can saying, oh crap, this product did not launch well. I’ve got 60,000 units sitting there and it was an expensive launch and I have no recourse for this, so I’m always going to be placing more frequent orders, especially at the beginning. And after the first two weeks of a product launch, my team is ready to place a new order for any product because we need to make very quick decisions, because I’ve got very little inventory I’m working with and I need to be able to react quickly. My overarching goal for you here is that your goal should not be to accurately predict the exact inventory amount that you need for every single product launch. The goal here is to be able to survive being wrong, and have enough cash to be able to scale and make up the difference from all of those, you know, quote unquote failures of when things do go wrong. Your job is to protect your cash so that you stay adaptable and you get to stay in the game.

Josh Hadley 00:27:04  Let’s talk about my favorite strategy to mitigate this Kryptonite inside of your e-commerce business. And that is number one by implementing a pre-order page. So again, this is definitely focused if you have a product that is on Shopify. This is where the rubber really meets the road. And if you have a Shopify storefront and this is something you’re not doing, you’re leaving massive value on the table. And number two, I have no idea how you’re even forecasting your inventory to begin with, because what a pre-order page will allow you to do is it will give you a good idea of how much demand there is in the market for your particular product. And as you do this, time after time after time, you’re going to see what the leading indicators are to wear. Holy cow. We’ve got a hot one on our hands. Or hey, this was kind of like a lukewarm reception from the market. It’s still worth, you know, launching this product, but instead of ordering, you know, the 50,000 units, I am going to just start with the 10,000 units because, like, we didn’t get an overwhelming response.

Josh Hadley 00:28:02  We’ve seen both ends of the spectrum here. And so one of the important things to do is like create that pre-order page, tell the customers that they’re getting their product in 30 or 60 days, and keep running the funnels on meta and add that landing page that is basically a pre-order page letting them know they’re going to get it later. It’s like the Kickstarter model. And what’s the benefit of doing this number one? It’s going to allow you to have a much accurate predictor of your forecast, rather than just kind of shooting from the hip and thinking that you know what’s going to happen. Even though as I started this, you know, podcast, I told you, you’re going to be wrong 100% of the time. Even if you have this data, you’re still going to be wrong. But now it at least gets me in the right ballpark. Okay, but one of the most significant values that you get from implementing this strategy in your business is it improves your cash flow immediately. Immediately you’re collecting cash from customers and then promising to give them that product later.

Josh Hadley 00:29:00  There’s nothing even there’s nothing better in business than when you get to collect the cash before you’ve ever even had to pay for that inventory or that service, or pay your team members. That’s flipped the cash conversion cycle to be negative, where you get the cash in the business before you’ve ever had to pay for the, you know, the inventory or the the service that you’re ordering. So that is the key. That is where the gold sits when you have that implemented in your e-commerce business. That’s the magic. That is when you’re going to be able to scale almost infinitely is if you get a negative cash conversion cycle working inside your business. But it’s genuinely quite the opposite. Most ecommerce entrepreneurs and most ecommerce brands that go to die have a very terrible cash conversion cycle, which means they upfront a massive amount of cash, and then they don’t collect the cash from the buyers until a much later date and time. Sometimes that time is like almost 180 days to 360 days from the time that they actually put out the money to place the deposit on the initial Po.

Josh Hadley 00:30:06  And then it takes them so long to sell through that inventory, the cash doesn’t fully return until 360 days. That’s how you die. But flip that script. See what happens if you actually get your money 30 days before you ever have to pay for that inventory. See what that changes in your e-commerce business. So a couple things on that point. If you’re interested in learning more about how to optimize the levers for your cash conversion cycle for your business, go check out my Cash Conversion Cycle Podcast episode. It is all things about improving your cash flow, and even how to track your cash flow on a cash flow tracker, because that is one of the primary guardrails and compasses that you should be using in your e-commerce business to know whether you’re winning or losing. As we wrap things up, I want to leave you with kind of like just a distilled summary of everything that we talked about and the big takeaways that you should be sharing with your team and implementing as frameworks inside of your business. Number one, you need to forecast at the SKU level, not just at the parent level.

Josh Hadley 00:31:04  Make sure every single skew has their own forecast. Number two never order more than one year’s worth of inventory. That is a hard rule that we have implemented. And guess what? Naturally, even if a product is declining and we originally thought it was a year, but it actually ends up being 18 months, like that’s why it’s a hard cutoff at 12 months for me, because sometimes that’s going to bleed into actually being 18 months or two years worth of inventory. So remember that. Number three, treat temporary demand spikes as what they are. They’re temporary. So don’t budget them in to your overall forecast. And don’t say oh great. I had a viral video on TikTok. That viral video will hit and it will trend, and it will increase your sell through rate for a moment in time. But before I’m going to go double down and be like, oh, this is the new future, I’m going to want to see that I’m getting more and more viral videos before I base my demand based off of that.

Josh Hadley 00:31:57  Number four, forecast declines. When you have a product that is based on a trend or a saying, or it’s a gift, or it has a theme or a design or color variation that is just kind of like trendy. You need to be forecasting declines year over year because like the trends are going to change. So don’t anticipate you selling as much as you did the prior year. And you should always be launching new. So on that point number five, buy less of your old products, but place more bets on new designs. That’s something that you should always be coming out with. Number six, for seasonal products that have a cliff where like it goes from like 0 to 100 and a period of, you know, a few weeks, those are the products where we want to specifically run out of stock shortly after the very peak demand week. So we’re forecasting to run out of stock in the middle of the season essentially. Number seven, raise prices when the inventory is selling faster than expected. And guess what.

Josh Hadley 00:32:55  Sometimes you might find that your sell through remains the exact same, which is only going to help and improve your business in the long run. Number eight use pre-orders when demand exceeds your available inventory and you’re actually out of stock, start initiating pre-orders. It’s going to bring in more cash into the business and help you increase your ability to forecast and predict more accurately for those future Pos. Number nine have a liquidation partner before you actually need one. So begin building those relationships now. Begin planning the strategy of hey, if the crap hits the fan and I’m not selling this product through, how am I actually going to be able to remove this inventory outside of just paying for removal fees or disposal fees, things like that? And last but not least, protect your cash flow before protecting your in-stock rate. If push comes to shove, I will always protect my cash flow rather than my in-stock rate because guess what? Cash flow, profitability, and staying alive are the ultimate goal of the e-commerce game. You can recover from being out of stock, but it is much harder and will take you years to recover from putting yourself in a cash crunch position.

Josh Hadley 00:34:04  Ask me because I know it, and I’ve lived it, and I’ve been there, and I placed myself in those situations where I was cash constrained. And then guess what? We had to compress our margins and that the business did not succeed as well as it did in previous years, because we put ourselves into really difficult positions. Okay, so ultimately, what is the goal of an e-commerce business if you are the owner? The number one metric that you should be looking at is distributable cash. Distributable cash is the number one kind of like growth metric in any business. Because if you’re able to distribute cash to yourself and fund new purchase orders for your business, you’ve obviously got things working well from not only your forecasting and inventory perspective, but you’ve got healthy margins. And at the end of the day, are we not in the business to be able to provide a living for ourselves? And you’re going to need that distributable cash in order to live. If you found value in this episode and you want to share this with your team, you want to share this with another entrepreneur that needs to hear the same thing.

Josh Hadley 00:35:00  Basically, download these slides. Here’s a QR code. If you’re just listening to this, come check out the podcast on YouTube. You can see this QR code here. Scan the QR code, get access to these slides, and then guess what my favorite thing would be is download the slides, upload them into your AI, your LM of choice and riff with it and create your own SOPs for reordering for supply chain forecasting everything that you need. Because this is the Kryptonite of your business, it can be the silent killer. If you do not implement a proactive strategy and actually plan out how you’re going to manage Kryptonite, not making you powerless in the business, and instead giving you the keys to hold the power inside of your business. Ultimately, systems in focus start here. So if you found value, please leave a review on your favorite podcast platform. Share this episode with another operator who needs to hear it. And last but not least, if you found enough value, share this in another mastermind group, share it on LinkedIn, share it on Twitter, and remember systems and focus scale while distractions kill.