The $5M Inventory Management Catastrophe

Direct-to-consumer e-commerce brand selling seasonal outdoor gear. Strong brand, loyal customer base, profitable.

Holiday season 2016 was huge—sold out of inventory by mid-December, turned away $2M in orders. Founder and I agreed: we'd never miss sales again. For 2017, we pre-ordered 3x inventory based on 2016 demand plus expected growth. Manufacturing required 6-month lead time and 50% deposit. We committed $5M to inventory orders in April 2017 for delivery in October.

Summer 2017: two competitors launched similar products at lower prices. By September, our pre-orders were down 40% from forecast. October: inventory arrives. We have $5M in gear and weak demand. Tried aggressive marketing—spent $800K, only moved 30% of inventory. December: still sitting on $3M of inventory. Tried fire sales, discount retailers—margins evaporated. Spring 2018: still had $1.5M in unsold inventory. Much of it was seasonal—couldn't sell winter gear in summer. Eventually liquidated for $0.20 on dollar. Lost $4M on inventory alone, plus $800K in failed marketing.

• Never commit to more than 150% of prior year's proven demand
• Split orders into tranches—place 50% initially, retain option for more based on early demand
• Build competitive monitoring into forecasting—factor in market changes
• For seasonal products, cap inventory at what you can liquidate at 50% margin
• Negotiate inventory financing with manufacturer to reduce upfront capital risk
• Create "inventory stress test"—what if demand is 50% of forecast?