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How successful DTC founders think about cash, inventory, and margin · The Modern Supply Chain

• Nik Sharma (00:05): I think the three biggest places that people don't understand sink a lot of their dollars. One is ads, of course, that's the one everybody knows. One is inventory. And then the third one that people don't really realize at all is everything related to 3PL and shipping. When you look at Portless for what you're doing with air freight directly from the source and delivering it here, compared to what some of these 3PLs are charging, it's insane. And they're hidden fees and tech fees and all these random things. Izzy Rosenzweig (00:31): How have you seen tariffs affect the brands you work with? How Nik Sharma (00:34): I've seen brands react to it is one is definitely raising prices. Anything that was not showing really good results was basically just cut overnight. A lot of them cut agency partners or vendors. There's no reason that we should be bloated in the first place and something like that made us realize that we were too bloated. That's really where I see that two plus two setup, the two senior people onshore and two senior insanely smart people offshore. Izzy Rosenzweig (01:00): It's crazy that the days of smaller teams getting sexier, right? Nik Sharma (01:03): Yeah. It used to be like people would brag about the office with how many people and now it's like, "Oh, that sounds like the biggest headache in the world." The people that are really at risk, in my opinion, are not immersing themselves in all these new tools. If you're at a brand and doing the bare minimum, you're about to be out of a job for sure, completely out of a job. Izzy Rosenzweig (01:26): When you start your brand, don't even try to compete with Amazon. You must build it from the ground up, healthy, profitable. This is not version one anymore. Taylor Holiday (01:34): The biggest line items in any e-commerce business are always going to be the cost of goods of the product, the fulfillment of that expense, and the marketing. Those three things, I am just convinced that we are headed towards ongoing innovation all the time about the way that that happens. Izzy Rosenzweig (01:49): Cog is your highest cost and your capital's tied there. So how fast are you going to cash out of capital? How much inventory do you need at any given time? Taylor Holiday (01:57): One of our longest standing customers is an amazing apparel brand and they got to a place where they were like 50 million in revenue, doing 12 million in EBITDA and had never distributed a dollar because every year to grow the subsequent 30%, they had to tie up so much investment capital into inventory that the cycle just never ended. And so they were totally P&L rich and just totally cash poor. Izzy Rosenzweig (02:21): P&L, great EBITDA business. They didn't have cash. So you're going to have to build for an exit, which still needs EBITDA or better building model where you could actually take off EBITDA off the table because you have cash flow. Now I would say this is what Portless does, and I'm not here to talk about Portless, but literally Portless can take a $10 million inventory and remove that down to two million because you can take in goods and sell them and then recycle your cash. Taylor Holiday (02:46): If your business can't service debt, your capacity, your options in terms of the buyer pool gets shrunk dramatically. Whether you hope to sell one day or you hope to put a bunch of money in your pocket, I would argue that both require the ability to produce free cash flow. Izzy Rosenzweig (03:05): If I understand correctly, you guys have a diversified supply chain, multiple countries around the world. How do you balance diversification versus once you're so diversified, there's also hard to control? How did you think about that? Did you do it early on? Was it once you certain scale? How do you think about diversification on supply chain? Brian Berger (03:23): The way we thought about our supply chain is really threefold. The first is where can we make the best product? The second is where can we make the best product for the best price? And the third is just sort of like an eye towards concentration risk. Once we got to a certain place, we just wanted to make sure that we had some ability to toggle if need be. This was not even in the current geopolitical environment we're in. It could just be something happens in your factory or in the local area where you're producing. Izzy Rosenzweig (03:58): And I guess on that note, you mentioned you started with underwear, right? It was hyper-focused. Now you guys are much more than that. Was that the balance of expanding SKU count, I think equally ties to risk of inventory, risk of capital. How do you manage that? Brian Berger (04:15): We started a little bit more than just underwear. We had underwear socks, t-shirts, undershirts, and a handful of variants within those as silhouette variants, but it was still very limited. And the idea was let's only play in categories with very minimal inventory risk. One, so fully produced product would never have to be off price and liquidated because that's a bad thing and it cheapens your brand and the way consumers think about it. And then also you could create some cost advantages because you're able to mass-produce gray, which is fabric that isn't all the way dyed or cut. And so you can position that based on what products are working. And still, a high percentage of our volume comes from things that fall into that definition, but we have meaningfully diversified the product assortment. And to your point about capital allocation, yeah, you're making bets. (05:10): The first was a bet. We bought, I forget how much it was, but it was not an insignificant amount of inventory for a brand that never existed and had zero track record. We didn't kickstart or anything. We loaded up the warehouse. We teed up a bunch of marketing and PR and we launched the business. And that fortunately went well, but then what? Second round needs to be more and how much more and in what sizes and colors and things like that. And eventually we got smarter and better about that. But still to this day, we're launching a new product category, outerwear, jacket for the fall, how much should we buy? There's still a bit of art and science that goes into those decisions and there are decisions for buying $25,000 of a fall style that I've never sold before, that's 25,000 I can't spend somewhere else. Izzy Rosenzweig (06:03): So on the essential side, in the early days, the bet, it could last you. It could take you where you need to go because they don't go out of style. But when you go to newer bets, is it a small batch manufacturing to get where you need to go like this outerwear, jackets, do you still go all out or it's like, no, let's be okay to be sold out and then that will inform a next year decision? Brian Berger (06:27): I think it's the more the latter. We have a crescenta drava assortment that is meant to be always in stock, always something to buy if you really want that because you bring up the full Monty, but always in stock. And then anything that we consider to be a seasonal item, we typically buy on a 10 to 14 week want to be sold through it completely kind of thing. And Izzy Rosenzweig (06:51): You mentioned something really interesting that I've heard other founders talk about, but I don't know if that's simple to execute. You mentioned that when you buy material, you buy it in a way that can be allocated in a few ways. Can you talk a little more about that? Because I don't think brands are very familiar with that because you could also cut lead time. If you could upfront buy material that could be used in many different ways, the ability to time to production massively increases. So can you talk a little about that, that I think most brands aren't familiar with? Brian Berger (07:20): Yeah, and that is and was certainly back in the early days very important to us because that could shave 30 days off of the lead time for the product, which is significant. And yeah, and just the way that it works, I'll give you an example. One of our hero fabric platforms is called ACE. It's a jogger, sweatpant, three different silhouettes at top, a pull zip, a hoodie, crew neck, and something else. That material is responsible for all those products and it is an always in stock regardless of season assortment for us. So we are able to produce that fabric in advance, which is part of what we do is all of our materials are proprietary in some way. It doesn't mean that another brand can't have the same formulation, but we're not really buying anything off the shelf from the existing fabric. It's part of what we talk about. (08:23): It's what we use to engage our customers. It's part of what makes the product special. Everything we make has some degree of lead time to the tune of 30 plus days. So if we can make that in advance, a roll of that or certain yardage of that, we do take on some financial risk to do that. It's not free, but we know that we're going to call that inventory of fabric to get dyed and cut within a certain period of time. And that enables us to shorten the lead time, have a little bit more flexibility in terms of quantities, don't have to make the call. Again, all the things that you and your business are enabling, which is really about putting that decision much closer to when the product is actually going to be sold. Izzy Rosenzweig (09:08): So you know you're not going to liquidate, you know you're going to eventually use it, increases your time to market, which again affects cash flow and affects the way you run the business. When we talk to brands and before engaging with us or other models, I'm like, "How did you guys look at going global?" They would literally manufacture, put products around the world that do two containers to Australia, two to the UK, two to the US, two to Canada. And now you have literally inventory around the world, UK is crushing it, Canada's doing terrible. Well, now you have dead inventory in Canada. And that is just some of the old ways of running supply chain and how we've seen, no, unify your inventory under one hub, ship to all these countries, keep it simple. I'm curious as you got started and talking to customers, how are some of the old ways of going global that you've seen that were just not so simple? Darwish Gani (09:59): One of the biggest dichotomies probably in the new and old really comes down to the marketing motions in teams. A lot of times what I'll hear from teams is, "Hey, I want to go conduct in-depth market research. I want to go do a full competitive analysis in a market. And then we're going to evaluate one market for a quarter and going to launch that market maybe in the next quarter or two. And then we're going to sequence that year over year or every six months and rolling windows." And I think that's the traditional kind of mindset. And I think the beauty is you don't have to do that anymore in a digital first context. The reality was historically, if you were selling to wholesalers, you're advertising on TV and billboards and you're selling retail, you kind of had to do that. Izzy Rosenzweig (10:41): I actually find that we have customers around the world and it's usually the US customers that I'm telling this to. I'm like, "You guys are crazy. If you're not shipping global, you are leaving money on the table." But interesting enough, Canadian founders, UK founders, European founders, Australian founders, they're almost forced to think outside the country because the country's quite small. And US is a big market. It is the prize. But because of that, them as entrepreneurs are actually forced to think from day one. And I would agree with also the younger founders in the US usually get this. They understand we're going to live a global world. There's TikTok, which is global, there's Meta, which is global. So you have global distribution from Meta TikTok. You have Shopify software, which convert your currency easy. You have tax structure with the OpenBorder, you have logistics, let's say with Portless, it is not hard to go global. (11:28): Now, one of the other things that we often hear, and this is right up open boards alley, is going global, it's scary, compliance, slow down, break it out. I'm like, okay, there is the ability to ship affordably. Portless helps a lot with that. There is local currency. I mean, Shopify has it natively built in. I don't know if you guys get involved there, but it's pretty simple. Then there is, do I need local entities? And I think that's the part that scares people the most. So maybe Darish, someone wants to go into Europe or someone wants to go into a different market. Do they need to create local corporations? Do they need to create local entities? Maybe you could talk to that because I don't think people realize it is much simpler than people think. Darwish Gani (12:05): In short, especially if you're partnering with someone like you guys, you're shipping everything from China to rest of world. Really, you're not going to need entities in most of the regions to start transacting. There'll be benefits to entities over time in that you can lower payment processing costs, but fundamentally to start transacting at reasonable cost, you really can start shipping from China. What you may need though is in certain jurisdictions, tax registrations. So tax registrations are things that you can set up. They're not as heavy as entities. They don't have the same regulatory kind of administrative burden, but they allow governments to say, "All right, this is this person. They're selling in my country and they owe me X amount of tax. Here's where they're going to pay it." So in certain markets, UK, EU, Norway, they'll have different thresholds or some will start right away. (12:52): For certain orders, they'll say, "Hey, I want customers to pay tax on this and I need that remitted." And so that's where having tax IDs can be very, very helpful. Australia is another market where this is very, very common. Tax registrations can help a ton, especially if you're kind of lower value goods, maybe under de minimis, which I'm sure people in this industry know about it. Those are some of the main regions you'll need tax registrations in. And then obviously US sales tax is a whole different beast that you have to handle, but none of those require full entities. So some regulatory registration, but at a high level, it's a lot lighter than actually setting up entities and having to close books or do audits in different countries. Izzy Rosenzweig (13:35): Question on quality control. It's another thing that actually I am fascinated that more people don't do. We have hundreds of brands we work with, and obviously it's a much bigger world out there. There seems to be at least a common thing that I'm saying is that brands aren't doing quality control. Either they do it once and done and then they trust. So I'm curious, what is your perspective and any crazy stories around if you don't do it? Travis Wright (13:57): Yeah. I mean, it is the highest ROI thing you can do within product sourcing by a mile. 90% of horror stories I hear about sourcing, in the back of my mind I'm like, "If you would've used QC, this wouldn't have happened." Literally 90%. To give the audience understanding, quality control, what that means is hiring third party quality control agencies to come in and act as your representative to go and check the product. A lot of times this can be even more effective than using your own employees, especially if it's in categories that are new for you. So QC agencies are going to come in, they're going to go and they're going to do a full quality control inspection. There's different kinds. The most common one is going to be a pre-shipment inspection. So before the good ship, the agent's going to go through and check all the product and make sure it matches up. (14:50): They're going to check a lot of different things. So they're going to have normally an understanding of your specific product category. So they're going to know the right tests to run for socks or for waterproof outerwear, whatever the category is. They're going to go and test. If it's electronics, they're going to know how to test it, test the voltages and all. They're then going to go as a third party and give you a report and go back to the factory and say, "Hey, you didn't pass inspection." And then that's where it's way less of an awkward conversation because it's not you saying, "Hey, I don't accept this order." It's a third party who's neutral saying, "Hey, you guys did not follow the specifications. You guys have to fix this." And typically the factories are going to fix it. Now, sometimes they're going to have issues and push back or whatever it is and they're going to have their opinions, but for the most part, they're going to fix it because a lot of times the issues aren't even that big. (15:39): It's not expensive. It's like 200 to $300 for an inspection, which it's quoted by mandate. So it's like a full day of QC. And typically the QCC agencies are global. They have employees all around the world. So people asking, should I just do it for the pre-shipment? Should I do it only the one time first time working with the factory? For the most part, you should do it every single pre-shipment, at least the pre-shipment to just make sure, because factories switch things up, they change things, they make mistakes. There's a different person imagine the line at that point. So many times I've seen perfect productions for 10 orders in a row and the 11th order, there's a problem. And I'm so happy I spent the $300 on a $30,000 order to make sure that it's correct. Izzy Rosenzweig (16:25): One of the areas that we saw, a classic example to bring into a bit of a real world example, one of our customers, before we met them, before they reached out to us, they had two containers on the water to arrive September before Q4. They've been business for two years and come in, every single item is defective, and they've been working with this factory for years. If you lose Christmas season, for many business, it's 50% of revenue. That 30, $60,000 PO could be $600,000 or a million dollars of revenue. So that 200 bucks could have saved Christmas. On that end, they reached out to us, they did new production, they got it to us in October and we still caught the Christmas demand. But it was an example of if they just would've done QC, you can't do QC two months later if you're using traditional model. (17:13): We're a little more unique in the fact of Portless. We have many times, unfortunately people do not do QC, catch it at Portless, send it back same day, get it back a couple days later, but just can't agree more. You got to do what you got to do. Get the QC done, the quality control done, and that could save this year, next year, potentially a lot of money. Travis Wright (17:31): I have another crazy story from one of our clients, something you wouldn't expect. So we have a glass cleaning solution company. They do multiple eight figures. They're huge. They've been in business for a long time. We started taking over their supply chain, and so they had their. It's coming in tubes and bottles and those kinds of products, and they're like, "Oh yeah, everything's fine." I'm like, "I'm going to run a QC. What QC are you going to run?" I'm like, "I don't know, to be honest. I'm going to let the QC agent go and just pick around and see if it's going to be type of issues. We've been working on them for so long. It's fine." We go in and we see in the QC that they were underfilling the bottles by 10 to 20%. Izzy Rosenzweig (18:11): And you can't see, it wasn't a see-through bottle? It was like Travis Wright (18:13): Full? No, it wasn't see Izzy Rosenzweig (18:15): Through. Travis Wright (18:15): Wow. So how do you know? You just don't know. You have to take the factors. Unless you go and pump it all out or crack it open and figure it out, you can't really know. So the factors like that - It wasn't a Izzy Rosenzweig (18:25): Defective problem. It was literally they were reducing their cog by 20% and no one had any idea. No Travis Wright (18:31): Idea. Izzy Rosenzweig (18:35): We service hundreds of brands across the world, Australia, e-commerce equation, US, everywhere. And shots and goal is key and how fast you can react. And that's what we're seeing the best brands do. And it's interesting you said about there's base design and could do small edits. We're seeing fascinating business models come around, even in the so-called made to order business, which really the base is there and you're adding a zipper, you're adding a color button and allows you to be super creative. But in the world of small MOQ, small batch manufacturing, and getting it to market really quick, you got to test. You only need one winner to go from one to five million on that skew, on that style. But if you can't take those shots on it, you'll never know. You'll never have the opportunity to pursue these products that change the game for the business. Isaac Hetzroni (19:18): Absolutely. And where we got to very quickly at Esther & Co. Was where 50% of our budget was going towards restocks. So the products that we knew were winners. So the faster you can get there, I believe the faster you're going to be able to propel growth because then from there you can spend your marketing dollars on those products that are acquiring customers at an efficient rate versus continuously testing new products that have never seen the light of day. And so we very quickly made that shift. And that shift again in contrast was a lot harder at Tigerlily because when I arrived there, they'd never restocked a product. So I said, "Wow, we have to start over every single season. We have to start over every single month in our ad account." And just building the momentum there. So it of course took some time to start shifting that system, which we, as rapidly as we could, shifted there. (20:05): But again, it does take time to start adopting those principles within your business. But I truly believe that once you do, that's when you can catch fire. Izzy Rosenzweig (20:14): Not only time to market, but use of capital in the right places. And we actually built a tool at Wortless, which is it's sometimes worth making less gross margin if you could have less better payment terms or less money in inventory and use that money for marketing, use that money for testing these shot at bets. But we go down that path forever. So fascinating background. Absolutely love it. Aaron Alpeter (20:37): I would say that supply chain is more important now than it ever has been because it used to be that people used to build a company that had a great growth story, but maybe the profit wasn't there or operationally it was a mess. Acquirers aren't interested in those companies anymore. That is a hard path if you're not profitable or if it doesn't look at your scaling. And so you think about these brands that are going to market, that are being acquired, they have well-run supply chains, they have profitable businesses. And so I think that what we do now is more pertinent than it ever has been. Izzy Rosenzweig (21:07): So supply chain sexy again. At Portless, we scream about all the time. In order to run that phishing process, everything matters. Devil's in the details. Which trucking you're using, which factor you're using negotiating those factories. So I think it's time again for. There's never been an easier time to start a business, but it's never been more important to run it profitably. Maybe you talk to us with your first couple clients. Was there a common operational blind spot that you'd be like, "Ah, I'm seeing this once again." Any, I guess, method to the madness or common themes or businesses as you join? Classic example, this is an area they need to double down into. On a brand that is just getting started and they want to make sure to get as operationally efficient from the get-go, what is that one thing you would advise a brand to do? (21:52): Tech stack, operating system? What is a key piece of advice you'd offer? Aaron Alpeter (21:57): Yeah, I think efficiency can mean different things at the life cycle stage. My advice to them would be to keep things as simple as possible. Pick up variable costs when you can versus fixed costs. Use consultants, use outsourced operations. Even if the margin may not be great to start with, the key thing that you're doing as a founder is you need to prove that you can build a product that people want and that they want to buy it, right? You do not need to squeeze out an extra couple points in margin right now. Again, you need to be profitable to think about all those sorts of things. But really what you're trying to do is you're trying to prove this thesis that people want to buy what you're selling, and that's the first thing. And so everything else that takes away from that, you should say, "How do I outsource that? (22:35): How do I get rid of it? How do I automate it? How do I kick that can down the road so that I can focus on those other things?" Because if I have to spend my time printing off labels and shipping orders out versus talking to a customer and giving feedback of what's there, I mean, entrepreneurs are going to work 80 hours a week anyways, but you still can't make more than 24 hours in a day and your bodies still need to sleep and eat and shower and interact with people, all sorts of things. And so there is a finite amount of time despite what we tell ourselves as entrepreneurs. If you're just starting out, the key thing is make it as simple as possible, be able to explain everything, be willing to afford and to pay for other people to do things that you can't do or don't want to do, but also don't outsource that responsibility. (23:17): Make sure that whatever you bring on you hire, they are teaching you and that you're kind of upskilling yourself because that's really what you're paying for at that stage. Izzy Rosenzweig (23:25): At Portless, we see the same thing. As much as you want to help everyone help with their supply chain, in the first, I call it zero to a million dollars, you're really figuring out, do you have a good product? Do people want it? And do I have a way to do distribution? Then you can start optimizing supply chain efficiency, increased gross margin, increased cash flow. If you over optimize that too early, you're not focused on the main thing. Do you have a good product? Do people like it? So absolutely love that. Thank you for listening to the Modern Supply Chain. If you have questions about anything we talked about, you can find me on LinkedIn. And if you're interested in learning more about Portless, check out our website, portless.com. As always, hit that follow button so you don't miss an episode. See you next time.