26 Oct Managing Supply Chain: Cash Flow & Inventory
In late 2014 and early 2015, local yarn stores all over America felt the effects of the labor disputes in the west coast ports. The International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) struggled to reach an agreement over a number of issues, with the result that the volume of cargo coming in from China and other emerging markets in Asia fell dramatically. Why did this matter to the yarn industry? It mattered because most of the superwash wool yarn currently on the market is processed in mills in China. Suddenly, there was a shortage of the major brands’ products across weights and gauges. Yarn stores were limited to the stock they had on hand, and calls to their sales reps ended in frustration. The only answer was that it was somewhere in transit between the factories in China and the docks in California.
Consequently, retailers were scrambling for substitutes. Let’s say you had a class scheduled for a baby jacket knit in chunky superwash wool and 10 paying have customers had signed up for it – you needed to have enough yarn on hand in an array of colors so that each customer felt like they had a choice. If the recommended yarn for the pattern wasn’t available, the next logical step was to start calling reps from other manufacturers to see what they could get to you ASAP, and that’s what you sold to your customers who signed up for the class. For many, this left a bad taste in the mouth and affected their willingness to continue doing business with a particular brand.
Let’s look at the fallout from an incident like that. The LYS owner who started calling around for an appropriate substitute has to find a vendor who has enough stock in a range of colors ready to be shipped that day. If she doesn’t have an account open with that vendor, she may have to commit more of her resources to a new minimum order than she had budgeted for that month. And what about the vendor of the original recommended yarn? Those dollars and shelf space have now been allocated to a competitor’s yarn and it may be hard to win it back. The vendor who had stock on hand may well have been waiting for new product to arrive, too, but just happened to have enough to meet the needs for that one particular account. Or maybe they overbought and this was a great opportunity to unload stock that had been sitting in the warehouse. Or perhaps they have a different source, or at least one coming into North America from a different direction.
This example highlights all of the pressure points in supply-chain management: manufacturing, shipping, distribution, inventory and cash-flow. Striking a balance among these various demands is a challenging but essential part of making your business work. While we may not have all the answers, we want to share some considerations to help you make the right decisions for your business.
The global shift of the textile industry illustrates one end of the supply chain. For example, the processing of cotton yarn and textiles has chased the cheapest production costs in labor from the UK to the mill towns of New England, then down to the Carolinas and from there, to China, India and Mexico. Interestingly, some production has returned to the US recently: growing awareness of air pollution, global warming and the rising wages in emerging economies has made it feasible to bring manufacturing back to the states, especially with increased automation in the factories. The labor costs that drove manufacturing overseas have been cut because it takes far fewer workers to operate the automated equipment than it did 30 years ago. Factor in lower transportation costs and faster turnaround time and the tipping point for domestic manufacturing, particularly finished garments, has been reached, at least for some companies. Domestic manufacturing of cotton yarn for hand-knitting is still something of a boutique operation, but we’re even beginning to see a resurgence in domestic production here, too. Laurie Gonyea’s Feel Good Yarn Company produces Silver Spun yarn at North Carolina State University’s College of Textiles entirely out of American-sourced materials, Green Mountain Spinnery and Appalachian Baby are sourcing cotton from Texas and Kraemer is using US cotton for some of their yarns.
However, it’s a different story on the wool side. According to the International Wool Textile Organisation (IWTO), Australia accounts for about 20% of the 2.2 billion tons of wool produced annually. From Australia, wool moves to China, where much of the world’s wool is spun into thread, woven into cloth and spun into handknitting yarns. The wool not heading to China will likely end up in Italy, the other major global center for woolen mills. Uruguay is emerging as a wool production center, too, because processing wool in mills in the countries where sheep are raised shortens the supply chain.Both Manos del Uruguay and Malabrigo Yarns, for example, sources their merino wool in Uruguay. Their factories are in Uruguay and Peru, so the fibers make only a short trip from the animal to the skein for the majority of their yarn bases.
But tight control of the supply chain from farm to mill can have its downsides, too. Any technical, mechanical or natural accident can throw off production and result in short supplies and thus decreased revenue. Malabrigo had a fire in the mill in 2008 which destroyed inventory and set their production back by about a month. Manos del Uruguay, on the other hand, COULD ship their yarn and consequently expanded their distribution during that downtime.
North American wool processing is rebounding like cotton processing. Since 1941, the Berry Amendment has required that all textiles and processing for materials purchased by the U. S. Department of Defense must be entirely American-sourced and made. The desire for an easy-care wool for both uniforms and technical clothing led the US Army to award a Small Business Innovative Research Grant to the Sheep Venture Company (owned by the American Sheep Industry Association) in 2009. The SVC then purchased superwash processing equipment for Chargeurs Wool in 2010, which now does the chlorine and polymer processes required for superwash wool before it is woven and spun by other US mills. Then, of course, there are the heritage yarn companies such as Harrisville Designs in Harrisville NH, Bartlettyarns in Maine, Brown Sheep in Nebraska, Briggs and Little in New Brunswick or Kraemer Yarns in Pennsylvania that have been turning wool into yarn for generations; and the newer companies sourcing their wool and manufacturing their yarn domestically, like Green Mountain Spinnery, Imperial Stock Ranch, Mountain Meadow Wool and Swan’s Island. For a nice overview of how one company, Brooklyn Tweed, manages their all-American supply chain, read their story here. As the demand for locally-made goods continues to grow, regional fiber mills will find their production schedules filling quickly.
There are a number of different models of distribution in the yarn industry. Many yarn companies are contracting with the mills to produce their yarn and then acting as their own wholesaler, like Brooklyn Tweed or Clara Parkes’ Clara Yarn. Others use wholesale distributors to reach the retail market. A few, like the heritage yarn companies mentioned above, allow retailers to buy directly from the manufacturer.
From a retailer’s perspective, dealing with a distributor that handles multiple yarn companies can make sense. If one brand is having a supply issue, the distributor can recommend a similar product from one of the other lines to fill a gap. Minimum purchase requirements will probably be lower than they would be directly from the manufacturer, allowing the retailer to limit the amount of capital tied up in any one company’s product. On the other hand, there’s an intimacy and directness in buying from the mill, or at least from the company that commissioned the yarn from the mill. It’s a closer partnership between the retail outlet and the yarn source.
From the yarn company’s perspective, selling product to retailers directly puts the yarn in that artisanal product category like farm-to-table food. They’re marketing their yarn based on the intimate journey from sheep to skein. Conversely, selling to retailers via a distributor allows them to outsource the warehousing and marketing of their products, possibly reaching a larger market share than they could on their own.
When you’re manufacturing a discretionary product like yarn for hand-knitting, you’re taking a lot of chances. While it seems like there should be something everyone can recognize as a “basic yarn,” the reality is that one knitter’s basic is another’s luxury or specialty yarn. Fiber, gauge, texture and color all play into a particular yarn’s desirability, and making the wrong judgements about what consumers will want leads to shelves full of unsold yarn. Remember eyelash yarn? The novelty scarves that were all the rage 15 years ago have all but disappeared. Or the “ruffle” yarn of just 5 years ago? Manufacturers couldn’t make it fast enough in 2011, but now it lies in the half-price bins of LYS’s everywhere, and most manufacturers aren’t even making it anymore. Pantone announces a new Color of the Year (or two, in the case of 2016) and suddenly the line-up of shades your “basic” yarn comes in looks dated. You have an overabundance of inventory that no one wants to buy and it represents money that you’ll never see again. You may be able to recoup some losses by offering it at discount or selling it to an odd-lots distributor who will find a market for it. If a particular yarn or colorway fails to find favor with consumers, you can discontinue it, freeing up some of your capital to go in another direction, whether it’s just new colors or an entirely different yarn, and then you’re putting yourself right back into the guessing game again. Following the TNNA Yarn Group can help you keep a finger on the pulse of what’s hot and what’s not in the yarn industry.
The flip side has to be considered when a specific yarn or manufacturer gets hot all of a sudden. Influencers like popular designers (we’re looking at you, Stephen West!) can make a yarn company take off. West’s designs have been integral to the growth of yarn companies like Madelinetosh and Hedgehog Fibres. It’s wonderful to have demand like that, but it can lead to frustration at the retail level. Formerly “indie” dyers who have scaled up to the wholesale manufacturing level cannot always produce and ship enough of their yarn to meet demand in a timely manner. Even if they control growth by limiting their retail outlets, LYS owners may be reluctant to commit their cash to what seems like an arbitrary shipping schedule. But they do, because that’s the yarn that their customers come in asking for and they want to sell what knitters and crocheters want to buy.
Ultimately, LYS owners have to aim for balance in their overall inventories. It’s hard to survive as a retailer selling only the high-end hand-dyed yarns or luxury fibers, and hard to compete with the big-box stores for market share of the lower cost synthetics. The desired standard is to stock enough of any particular yarn that any sized yarn crafter can purchase a sweater’s worth of yarn in matching dyelots and have a range of colors from which to choose. Meeting that standard represents hundreds of dollars of inventory; multiply it across yarn weight and fibers for a grasp of the inventory and cash-flow decisions that get made at the retail level every day.
Managing your cash flow is an essential part of keeping your company in business. We have seen, through every step of the supply chain, how both major disruptions and simple decisions can affect your cash flow. Ideally, your accounts receivable are larger than your accounts payable and your customers are paying you in a timely manner. The reality is that it’s not usually that smooth. Evening out the hills and valleys in your business’ cash flow will keep you going in the right direction. Let’s look at some ways to strike that balance:
- Terms: Make sure the terms you offer to your customers match those you get from your creditors. It’s hard to pay your bills on a 30-day cycle if you’re offering your customers 90 days. You may even want to offer a small discount (2%) for early payment. Or require a down payment before shipping and offer terms on the balance. The goal is to make sure money continues to come in while your products are going out.
- Turn a profit: You may have offered low prices when you started your business to attract customers. Over time, as you have expanded your product line and brought on new employees, your costs have increased. If your prices have stayed the same, your profit margin may now be in negative territory. You cannot sustain a business for long without adjusting your prices to reflect the real cost of doing business. In the world of yarn, your costs have to account for the commodity price of wool as well as the cost of production and transportation. All of the steps along the supply chain add both cost and value to the yarn and your wholesale price should cover those costs as well as offer you a profit. It may seem scary to raise prices, but if you have a good product that consumers want, your retailers will be willing to pay for it.
- Manage your growth: Lucky you! You’ve made the leap from Etsy shop to wholesaler of your hand-dyed yarn. But now you’re dyeing yarn 60 hours a week and spending another 40 running the business end of a hand-dyed yarn company. You need help. Consider carefully the best way to get it. Bringing on employees to lighten your workload comes with additional costs in compensation, payroll taxes and benefits, but if your orders require it, hire them. Or maybe you could outsource some of your business functions like bookkeeping or marketing.
Of course, a business loan can help level out those hills and valleys as your business grows. Having cash reserves to fall back on as you build your customer base gives you the room to offer your customers credit, to pay your suppliers and market your product until your cash actually starts flowing. The ability to pay back that loan depends on all of the other factors we’ve considered here: credit terms, profit margins and fixed costs, so you’ll have a good idea of whether your cash flow will sustain your business over the long term.
As a yarn manufacturer, you make choices at every step of the process about where you’re going to source your materials, how and where they will be processed and how you are going to distribute them to your market. Whether your goal is to provide an affordable yarn for avid hobbyists or a luxury fiber for couture hand-knitters, you are compelled to consider supply-chain issues. We hope this overview has given you some insight into all the factors you have to balance as you run a yarn business in the 21st century.
If you’d like more information about anything contained in this article, feel free to contact the owner of Stitchcraft Marketing, Leanne Pressly at 719-539-3110 or email Leanne@stitchcraftmarketing.com.