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This is The Modern Supply Chain, the show where we break down the modern supply chain strategies that help e-commerce brands shift from staying above water to predictably scaling.
Each episode, we’ll chat with industry experts who will help give you the tools and insights to take control of your supply chain.
Just smarter, faster ways to keep your business moving.
Jon Blair (00:00):
Scaling is a series of what I call risk-adjusted bets. We'll never have 100% information on any decision, inventory or otherwise, so everything inherently is a bet. And a good bet, good poker players know the odds and the probability they're making what they believe to be the most well-informed risk-adjusted bet.
Izzy Rosenzweig (00:23):
This is The Modern Supply Chain, the show where we break down modern supply chain strategies that help e-commerce brands shift from staying above water to predictably scaling. Today's guest is Jon Blair, the founder of Free to Grow CFO and the former CFO, CEO, and founding team member of Guardian Bikes. Jon joined the business that became Guardian Bikes as a part-time bookkeeper before eventually stepping into a hybrid role, CFO and COO role. He helped grow the D2C children's bikes brand from $0 to eight figures in four years and oversaw finance, fundraising, supply chain, and inventory planning. After experiencing those decisions firsthand, he founded Free to Grow CFO, giving growing D2C brands access to strategic financial leadership without hiring a full-time CFO. In this episode, we're unpacking what Jon sees differently now that he's gone from making supply chain decisions inside one of the fast growing brand advising D2C brands across the industry.
(01:18):
We'll discuss what the financials tell us where their brand is operating with real visibility, how to evaluate sourcing and supply diversification decisions without reacting emotionally and why a lower unit economic cost can become an expensive mistake once inventory risk and working capital enter the equation. First of all, Jon, thank you so much for being on The Modern Supply Chain Podcast.
Jon Blair (01:38):
I'm stoked, man. You've been on mine. Actually, back when this last round of tariffs first got put in place, it was super timely, so I'm excited to be here to chat with you, man.
Izzy Rosenzweig (01:47):
That was a hectic time and that was an awesome podcast. I think it was on your podcast back then, and it was always exciting and always so interesting, specifically because of your background. Maybe for those who don't know you, give us a little background on yourself, both your finance, but also operation background.
Jon Blair (02:02):
Today, I operate Free to Grow CFO. We are a fractional CFO and bookkeeping firm that specifically works with scaling D2C brands. But my background before this is actually as an operator within a D2C brand called Guardian Bikes. In 2017, which dates me a decade ago, the brand was on Shark Tank, partnered with Mark Cuban, scaled that up to what is now a nine figure brand. But I was with the company from the beginning through the first about 10 years, started as bookkeeper, then controller, then director of operations and finance, and eventually COO and CFO. And through that journey, that's really where I cut my teeth on understanding both the finance and operational perspective of scaling a fast growing D2C brand positively or cash flow positively and profitably. That's the caveat. And because of that intersection of operational and finance experience, because I was handling things not just like your typical accounting, FP&A, financial strategy, fundraising, but also I owned a 3PL relationship, I ran the supply chain, all aspects of inventory planning, you really start to get a sense of the tight, tight interwoven connection between finance operations and supply chain.
(03:18):
You can't separate them. And when you think about D2C consumer goods brands, what is the biggest line item on the P&L and the balance sheet? It's oftentimes some sort of inventory or supply chain driven cost. So it was really, really a unique experience. And fast-forward today, like I mentioned, run Free to Grow CFO. About five years ago, I just really saw that there was this huge gap between the point at which a brand needs just a bookkeeper and needs a full-time CFO. And that gap has actually widened as technology and AI has made it much more possible for a brand to scale with a fractional outsource finance team. We have now about 30 people on the team, 50 brands we work with, and we specifically focus on helping brands go from 10 million to 50 million plus.
Izzy Rosenzweig (04:04):
That's incredible. So one thing I found fascinating as a brand owner originally as well when I ran a browse is that there's almost like this double-edged sword here. It's never been easier to start a business. Shopify, you could be using Portless or another model, you could go from zero to 10 million to 20 million really quickly. While that's fun and exciting, if you do not have your finances in play, your balance sheet, your cash flow, you're going bankrupt. And I think such a unique background where you as a background as an operator and supply chain understanding and then seeing brands moving so quickly. So I guess my first question is, is there a common theme? So you have brands coming to you, let's say roughly a 10 million and you're like, okay, I've seen a lot of these. Let's look at this area of the business.
(04:52):
Is there a common theme that brands just don't look at before they become a fractional CFO to look at their business?
Jon Blair (04:58):
Absolutely. And I will start with a big generalized bucket and then go a little bit more narrow. The biggest thing that is usually bugging founders when they come to us is that they no longer have their finger on the pulse of the difference between cash flow and profitability. In the early days, they have it in their mind and they have a really, really strong sense of it. And tactically, what's happening that's driving this is more frequently someone's asking them to place a PO. The POs are getting bigger. The product catalog size is increasing. There's more skews, so there's more complexity. Oftentimes maybe there's new sales channels. They were Shopify only. Now there's Shopify and Amazon and maybe there's some wholesale and now there's more people working for the business. Now you're actually delegating some of the stuff that the founder was doing themself in the early days, which is how they had their finger on the pulse of profit and cash flow.
(05:53):
And now those decisions are being recommended or even executed by other people. And so they're starting to feel like, man, I don't know how this increased volume of decisions and complexity is driving profit versus cash flow. That's the first thing. But the second thing, and this is a new revelation for us in the last 12 months, we've existed about five years. We've had so many reps, we've worked with hundreds of brands. We're actually now starting to realize that actually, I would say probably 95% of the brands that come to us, they actually don't know that when it comes to scaling from a unit economic perspective, there's actually three different games that your brand could be playing. And there's actually not more than that. There's the consumables high LTV subscription game. There's the high skew count, which is high variant count, which is usually apparel game.
(06:43):
And then there's the durable goods game, no repeat purchase. And we're starting to develop a playbook. We've actually already developed a playbook that helps you think through the scaling risks of both scaling ad spend and scaling inventory levels in those three different games because they're actually quite different. The risk is quite different in all three of those games.
Izzy Rosenzweig (07:04):
Actually, I haven't heard that before, but you're right. There's subscription, either supplements or whatever you're selling and the gummies. What is your perspective, like the best versus the riskiest or they all could be good, run well, but do you have guidance like, "Hey, you're in this bucket, it's great, more risk."
Jon Blair (07:21):
I would say that I used to generally think high LTV or consumables brand is the best, but having the benefit of hindsight and seeing how we've helped numerous apparel brands, durable goods brands with no repeat purchase scale to very healthy eight figures and some even to nine figures, one is not better than the other if you know that the playbook is different. That's the key. High LTV is probably better if you don't know the playbook because you can accidentally get it right easier, if that makes sense. Gross
Izzy Rosenzweig (07:54):
Margins.
Jon Blair (07:54):
Exactly. And if you have enough repeat purchase that you can just get it wrong, you cannot even know you're executing the playbook. The other two, the apparel game and the durable goods game, we're working with some very healthy apparel and durable goods brands, but they're following a playbook that we have kind of broken down and documented and that we now bring to brands and say, "Hey, you're playing the durable goods game, you're going to have to have some version of these things and we need to think about inventory planning in this way from a risk versus return standpoint."
Izzy Rosenzweig (08:25):
So we work with a ton of apparel brands and I'm actually curious, is it a focus versus skew count expansion discussion? Maybe give us a little bit.
Jon Blair (08:34):
No, yeah let's talk apparel because apparel is actually the riskiest inventory game out of all three. And let's break this down for a second. What's the high level framework? So the apparel game can be high LTV, but it's not fast LTV. That's a difference between a consumable brand and an apparel brand. They can both be high LTV. The best apparel brands we work with have had multiple years of dropping new products, new styles, and they also know the seasonality of when they should drop those products. And they're very good at getting rid of stuff before it becomes what we call seasonally obsolete. So seasonal obsolescence is a huge thing that they are factoring in on the front end to their decisions.
Izzy Rosenzweig (09:19):
And just so I understand that, there is a strategic way to get rid of the stuff once it hits a certain marker in their season.
Jon Blair (09:26):
And specifically with apparel, just think winter clothes versus summer clothes. You're not blowing out winter clothes in May. It doesn't matter how low the discount, you've got to get rid of it before you get out of that season. I didn't know this before Free to Grow, but we now work with some incredible apparel operators and guess what they all are? They're all amazing at product development, amazing at product development and amazing at supply chain relationship management. Super, super key. And so the successful kind of playbook is you know what your customer wants during what months each year, what season each year. And so you're launching new styles that you're selling into returning customers and almost all of your contribution margin, all of your profits actually coming from return customers. And if there's enough, we can actually tell that brand to break even on new customer acquisition.
(10:16):
There has to be enough LTV, but it is not like the supplements game where you can lose money on customer acquisition and you make it back by month three, four, five, six. Because
Izzy Rosenzweig (10:26):
That's
Jon Blair (10:26):
Monthly
Izzy Rosenzweig (10:27):
Versus easily.
Jon Blair (10:28):
This longer tail, which may take 12 months, 24 months, 36 months to build that LTV. But here's how this ties back to inventory planning. That actually means for apparel brands, if you are not expanding your product catalog, your business could die. You do need to launch new products, but what's the trap? The inventory like cash getting tied up on styles that are not moving, variants that are not moving. So you also have to be ruthless on inventory management. That's why every big clothing retailer is so good at clearance, but they know they've got to clear that stuff out before they get onto the next season because if not, you're not selling that again till the same season next year, meaning you're going long on that inventory position for 12 plus months. So that's the high level apparel game.
Izzy Rosenzweig (11:13):
I've seen some brands like, "Hey, we will never discount. Liquidate it and get your next collection so you have cash to move it." And what you said is in a really good LTV, call it clothing brand, let's say you're open to being breakeven, but now you have breakeven, all your money going to Meta, let's just say, or Google, but you still need to expand your inventory, so you still need working capital.
Jon Blair (11:35):
Yep, exactly. And so a CFO, I think generally speaking, if you look at the analogous size in revenue, like brands across the three games, durable goods, high LTV, consumable and apparel, apparel brands need a CFO first, generally speaking. And it's because that cash flow game, you do need to put more working capital pressure on the balance sheet driven by launching new products to drive profitability up, but you can't get too far out over your skis or you can get into really, really big trouble. So that profit cash flow kind of dance is much more delicate in the apparel game. And I will tell you, probably 100% of the apparel brands that come to us, they already know they're way too long on inventory and they're like, "I'm not going to make this mistake again. I'm going to get my act together with a CFO and I'm not going to make this mistake again."
Izzy Rosenzweig (12:23):
A good accountant fund is worth the waiting goal for tax planning. A good CFO, you're not doing accounting work, you're doing strategic planning work. I guess the moment you allow brands coming to you, every branch will be throwing money at you guys because you get this wrong, you're not off by a couple points in your margin, you're going bankrupt. You just lost your cash to run your business.
Jon Blair (12:43):
Totally. Well, and it's interesting because you mentioned something important. The word bankruptcy, what precedes bankruptcy is the inability to service your debt. And generally that's not a P&L issue, that's a cash flow, that's a balance sheet management issue. You can be healthily profitable and go bankrupt. It happens every day to public companies. And
Izzy Rosenzweig (13:03):
By the way, I think early founders, I had this early on when I ran my brand, I didn't get it. I remember talking to my candidate, I'm like, "We're crushing revenue. What are you talking about balancing problems?" Again, hard lessons you got to learn early on unless you have background in it, but there are different sets of problems. You can have great gross margins, but how are you managing everything? So how deep do you got to go when you place a CFO with a customer? Are you just looking at their books? Are you interviewing people? What does it look like?
Jon Blair (13:27):
How deep we go depends. The general approach is we look at high level metrics to see where are the warning signs? Where are the flashing red lights? So for an apparel brand as an example, oftentimes like, man, we got 380 days of inventory on hand, flashing red light. So who might we want to talk to? We might want to talk to whoever owns inventory planning, whoever owns supply chain. We might want to get a little bit deeper into skew level days inventory on hand data. And then honestly, almost all of these problems that need to be diagnosed, whether it's on the P&L or the balance sheet, at some point you need to bring all three major functions together, finance, marketing, and operations, because at the end of the day, it's the actions that are being taken by the other functions that are driving unit economics and driving profit and cash flow, driving overhead costs.
(14:17):
So you can't do it in a silo. Our data is used to show us where the issues are to start conversations with the right parties in the business. And so how deep we go depends on what we're getting into. If we can tell there's an ad spend issue and we have a unique way that we do that, we break down what the contribution margin is of a new customer and a returning customer because they're not the same. Ad spend drives new customers and other retention tactics drive returning customers. If we see an issue, again, it comes back to the game they're playing. We know what we need from a new and returning customer depending on what game you're playing. And then we might need to go deeper to understand cohorts at a subscriber level versus non-subscriber level at a sales channel level, at an ad channel level.
(15:02):
So it just depends on where we're seeing potential issues in the data.
Izzy Rosenzweig (15:05):
You're very dependent on data on the ceiling. How common is it that brands come to you with crystal clean data versus like, oh man, now I got to get. I don't know what you do. Some branches don't have that. Or is the soft ecosystem to simply everything? I
Jon Blair (15:20):
Will say that e-commerce as a vertical is data rich, but as much as that's an advantage, it's a trap, it's a double-edged sword, a catch-22 for sure. If you were to ask me what data tends to have the biggest issues, when I say this, you're just going to start laughing because cost of goods sold data or other supply chain data. Land
Izzy Rosenzweig (15:39):
Cost versus pickup costs versus -
Jon Blair (15:41):
Yeah, landed costs. What is our landed product cost? And there's a lot of inputs into that. It's not just the supplier cost, it's the freight duties. Freight order, try-ons, import duties. Last mile delivery, all of that kind of stuff. That is the stuff that we spend the most time organizing. I guess morphine is
Izzy Rosenzweig (15:57):
Clean. It's kind of like Meta, it's meta.
Jon Blair (15:59):
For sure. For sure.
Izzy Rosenzweig (16:01):
Now that you're kind of in seat CFO, if you'd go back to running back the bike business, would you do anything different on the supply chain side?
Jon Blair (16:09):
Man, it was such a crazy time. I ran the supply chain from 2017 to 2021. And what happened right in the middle of that COVID? Honestly, we were just doing whatever the heck we could. Here's what's interesting. I don't think I would do much differently. And it's interesting because at that time there was a massive tariff that was placed on bikes that coincided. So we were dealing with the first round of Trump tariffs from his first presidency, coming off the heels of that going into COVID. So for a couple years before COVID, we're trying to figure out, do we move from a China supply chain to a lot of our competitors were moving to Southeast Asia, Cambodia, Vietnam, things of that nature. And yes, you could get a cheaper price out there, but we did a lot of analysis around. Well, here's what's funny. Who owned those factories in Southeast Asia?
(17:02):
The same Chinese factory. They were just shipping the parts. They're making the parts in China, shipping them out there, assembling them. And so what's interesting is once you kind of put the cost accumulation of an extra shipment, shipping those parts out to those Southeast Asia countries, and then the longer move, that's a longer move by air or sea ship. So that cost was higher. It didn't save that much money. It was a savings, but we had to compare that to the return on the effort and the headache, the implicit costs. You can't pull out dollars and cents, but it's like, man, we're doing all this work to reorient the supply chain. And so what's interesting is we chose not to do that and pay the higher duties. But what happened was all this volume moved out of our factory to these other factories, and we then became a bigger fish with our factory.
(17:50):
And they're like, "Hey, we want to work with you to keep your volume. What do we got to do?" We still paid a higher price, but then this is luck. When COVID happened, COVID decimated Cambodia, Vietnam, and these less developed countries. I mean, they were shut down far longer than the Chinese factories were or the US businesses were. And so here we are still getting bikes in China for a higher cost, but all of our competitors just couldn't get bikes at all. They were just stocked out. And so I think there's a lesson there for. And I bring that lesson forward to today. I hear a lot of brands talk to me about should we switch suppliers? Should we move to another country? And I said, "Hey, I don't ever think we should stop evaluating how to improve our supply chain costs. We should always be doing that for as long as we're in business, but there's a difference between an evaluation and/or a test and pulling the trigger and saying, we're now making this risk adjusted move.
(18:47):
Do we feel comfortable how risky it is for this potential unit economic upside?" I do think that you have to weigh the explicit costs with the implicit costs and ultimately unknowns that could present unknown risk to you.
Izzy Rosenzweig (19:01):
This is to me, I think is one of the most underrated part of decision making in this discussion. I think I just wrote an article on it this past week connected to the Canada Mexico trade war right now. We dealt with it similarly in China, into the China trade war. We have hundreds of brands that we service. Most of them are out of China. We're running operations out of Vietnam for about three years, understanding not everyone's in China. When the first trade war came, we thought there might be this massive migration, and we had a lot of brands talk to us like, "Hey, we know you have operations in Vietnam, so you can ship out of Vietnam. Let's look into it with you." And we helped them. We made introductions and they're like, "Oh, one second." And the classic example I always get is like, "Oh, I could produce at a factory, which happens to be owned by a Chinese operator, but the fabric mills won't give me anything less than 400 rolls.
(19:45):
And if I want to address, I got to buy one rule if I want to try a new design, call it five rolls, which now there's a 10-day lead time. And when it comes to embroidery or comes to buttons, it's just not as sophisticated. Well, we were ready to handle any migration to Vietnam. Didn't happen. There were a few tests, few tests to India and all those brands right back to China. And I think a similar conversation now is going on with the trade or Canada. So Canadian operators like, "Hey, should I move it to America? Maybe I should move it to somewhere else. Honestly, maybe China's cheaper right now." But the answer is no. You got to go really slow because every country has different raw materials, different labor expertise. Once you have something going and it's working, there could be equal or more risk shifting.
(20:29):
And it sounds like you guys take the bet to stay, which paid off, which will lead me to my next question. Did you guys have enough leverage to negotiate terms with your factory?
Jon Blair (20:40):
Yes. And we needed to look at. It wasn't just like, bam, we're going to get net 60 or net 90. This is another learning that I try to pass this on to brands all the time because they're always looking to improve terms with their international vendors. It's like, listen, this is a relationship. It's about trust. The classic example, use courting your significant other. The first date is much different than if you've been together for five years and you've proven trustworthy for five years. Imagine you can also be together for five years and prove yourself to be kind of sketchy. And all three of those scenarios I just laid out, you have different leverage from a relationship standpoint to make asks of the other person. But also too, and I think it's helpful to think about the significant other analogy, is you can't just take, take, take, take, take.
(21:32):
You've got to give as well. It does have to feel like a partnership. And so we went on many iterations of. Honestly, our first terms negotiation was just them committing a certain amount of volume to us and not kicking us off the line to bring a bigger brand in. And that was more important than payment terms at the time. And then eventually it was like payment terms, but we weren't able to just go straight from 30% down, 70% on shipment to net 30. It was like, we still need the 30% down, but we'll give you 15 days on the 70%. And we asked for that specifically because we needed 15 days to get the bill of lading to actually take title and then go to our lender and our lender is like, all right, you guys own that stuff now. Now you can borrow against it.
(22:16):
But then after that we're like, okay, how can we get the 30% deposit down to 15 and let's go out 30 days on the 70%? And so it should be continuous. You don't just hit a home run immediately. You got to just give them trust, show them they can trust you, and then ask for a little bit more and figure out what it is they need. And one of the biggest things I always ask brands, and look, the factory can lie. I don't ever know for sure if they're telling us the truth, but ask them what cash they need to place their orders with their vendors.
Izzy Rosenzweig (22:48):
Their raw materials.
Jon Blair (22:49):
Yes. Ask them what their payment terms are with their vendors. By asking that, what we found out was like, "Hey, look, we got net 30 with everybody, but this component, they make us pay up front." We're like, "Okay, that's 5% of the BOM cost. We'll pay you 5% in full upfront, and can we get a little bit more time on everything else?" So the more you can understand what their cash requirements are, what their cash cycle is, the better you can craft payment terms to meet your needs and theirs, because at the end of the day, they're going to meet their needs one way or another, so you might as well figure out what they are.
Izzy Rosenzweig (23:20):
I think there was one angle that you had, which was leverage, which sounds like you got one commitment, but you said something else, which is it can't all be take, has to be give. What areas could you give in? Is it price? It's got to be more than. I mean, trust is great, but what else can you give? I mean, when we do analysis, you could easily see by paying a little more, you open up cashflow, and that money generates more positive cash flow than the 5% you had to do an increase. But that's just one example. What do you mean by give? What's there some examples of give?
Jon Blair (23:48):
Price is obvious, but also just consistency, consistency on paying on time and just being a proactive communicator. It's so easy to become a reactive communicator with a Chinese supplier just because you're busy, not because you're actually sketchy. The other thing is giving them forecasts, even if you don't want to give them a hard. You can give them a hard volume commitment. We've done that before, like a minimum, but you can also give them soft commitments. And so one thing we were doing is we were doing monthly forecasts with them, and every month we would update them and we would tell them why it was getting updated. The more you kind of open the kimono, so to speak, that is giving to them even if you're not giving them more money, but you have all those things that you can play with. Another thing you can give is refer them business.
(24:35):
That's a big one that if you have someone who's in the same space, they're not a direct competitor to you and you're friendly with them and they're looking for factory options, make introductions. That's a big one. That goes a long way, and I've seen that play out in all areas of business, not just in consumer goods, is if you can refer business to your partners, they're much more likely to work with you. You're like an ambassador, you're an advocate for them, you're a referral partner. And it's like, man, these guys are referring us. They really trust us. We got to make sure we keep these guys around.
Izzy Rosenzweig (25:09):
The partnership as a relationship, as you said, in China, I would highly recommend going there in person as well. Totally. It sounds like you did, right?
Jon Blair (25:15):
Yes, that's key. There's a
Izzy Rosenzweig (25:16):
Word from getting the word, but face-to-face meeting matters a lot as part of -
Jon Blair (25:20):
Total relationship. Yeah. And what's interesting is when you go see them in person, I've gone to see people that I've only interacted with via email, even though we have a trading agent in the middle who's interpreting, they've only ever seen translated written word from me. And we've gotten on calls, but they've only ever heard through a translator. When I go see them in person, even though I still can't speak their language, there's just this barrier that melts away. And also too, as you know, they're really big on every single night you're going to go to dinner with them and you're going to spend many, many hours with them. I mean, yes, gifts, don't show up without a gift. Don't do that. That relationship matters a lot. And it's interesting. I've even seen how once you do that, how much quicker they get back to you when you're back home.
(26:12):
And so anyways, that really does go a long way.
Izzy Rosenzweig (26:15):
I guess last question on the inventory side and move to a different topic. Some brands are like this really hard balance of buying enough inventory versus running out of inventory. Are you going to be running out of inventory? Good for you. Yo had no excess inventory. But also, you're an idiot because you lost sales.
Jon Blair (26:32):
Yeah.
Izzy Rosenzweig (26:32):
And maybe it ties into your playbook, which again is
Jon Blair (26:34):
New to me. It does. It does.
Izzy Rosenzweig (26:35):
Maybe that's what it is. There's this really important decision matrix, and I guess do you guide brands in that based on historicals, based on projections, based on the liquidation plan, boom, this is how you do POs?
Jon Blair (26:47):
So let me explain this conceptually. If you want this to be done in your brand, you can hire a CFO to work on the nuances of your situation because every situation has nuance. So there's guidelines and there's conceptual frameworks, but then at the end of the day, we have to break this down and make it the best bet. This is a bet, let's be clear about that, that we can make for your business and you as an owner. And so in the grand scheme of things, what we're doing, what we train our CFOs to think like, in some respects, a poker player. Scaling is a series of what I call risk adjusted bets. We'll never have 100% information on any decision, inventory or otherwise, so everything inherently is a bet. And a good bet, good poker players know the odds and the probability that they have the best hand.
(27:33):
They don't know for sure. They know the probability. They're making what they believe to be the most well-informed risk-adjusted bet. As a general statement, you can push more of your chips into that bet if there's less risk involved. If there's more potential risk, you want to be careful about how many chips you put on the table, and it's no different with placing inventory bets. Now, there's different risk profiles for inventory purchases depending on what game you're playing. It also depends though, regardless of the game you're playing, what your balance sheet looks like, because you may have cushion on your balance sheet in the form of equity or cash reserves that can change. It doesn't reduce the risk of the bet, you just have more resources to absorb downside risk, right? You got to ask yourself though, do you want to put all that capital at risk?
(28:25):
That's the real decision. But for generally speaking, a high LTV consumables brand that already has strong historical data on retention, lowest risk for placing inventory bets, and I would generally say over index for more inventory than not. Why? Because your subscribers are coming back likely every single month, and so you have this known demand with a known retention or churn curve from your historical data where you can say like, "Hey, if I place too big of a bet, I still got this demand I know that's coming." New customer dominant or durable goods game, that one is riskier because there's no repeat purchase. You have to be first order profitable. A new customer has to buy that product, and if your acquisition costs, your ad spend per new customer is creeping up and you're getting close to first order or new customer unprofitable, you may have to spend so much money on ads to liquidate long inventory positions that you have to do so at a contribution margin loss.
(29:24):
There's more risk there. And then there's sort of a hybrid situation with apparel brands. For apparel brands, it's more just that because there's so many variants, because sizes, colors, the SKU catalog is so big, you may end up having such a big catalog that you could just turn out idle inventory that it's eating up cash because you've just got it locked up in so many different skews. And then there's that seasonal obsolescence risk where you're like, "Dang, I missed the season. I ordered too much and I got to wait till next winter, which is 10 months from now before I'm going to be able to sell it again. You
Izzy Rosenzweig (29:58):
Just sell words liquidly.
Jon Blair (29:59):
Exactly. The high level, there's more. But again, you always run those general rules back up against what's the founder's risk tolerance and how much cushion is there on the balance sheet to absorb the shock of downside risk actually coming to fruition.
Izzy Rosenzweig (30:15):
Prediction question, final question. Shift in AI from your perspective, everyone has their own different lens on AI. What are DDC brands? Are they going to look different? Are they going to operate lighter? Or maybe that's a little too much froth in the AI world? What is your perspective seeing all these really amazing brands at scale layering AI and how do they look different?
Jon Blair (30:37):
It's interesting because before that fateful day when Claude this last spring just made a leap and everyone was like, "Dang, this is crazy." Brands were already surprisingly lean. But you know why? Because we're coming off of an asset bubble bursting. The COVID institutional capital backed bubble in e-commerce burst in 2021, 2022, and three, four years later, brands are still correcting to that. But one of the biggest things that has happened over the last two to three years as that market has corrected is brands have already inherently gotten leaner. So brands are already historically crazy lean. So really AI is just pushing them a bit further in that same direction. And so I think that's actually a blessing for e-com brands is that it's not so weird to be adopting this stuff. It makes perfect sense with how the fixed overhead cost structure has already been evolving in e-com.
(31:34):
And so yeah, I think brands are just going to continue being lean and mean with very few people internally that work full-time for the business and they're going to outsource to specialists, specialist 3PLs, specialist finance firms like Free to Grow CFO, specialist marketing agencies. And that's where they're going to basically take this lean team plus specialists and technology to continue to run these really lean enterprises, especially the ones that are trying to stay e-com purist. Headcount will rise as they get into physical retail because that is just a much more manual game to manage. And I think it will get more automated, but it's more fragmented across the various customers. And so I see it as really exciting. What I think it's going to do to, it's already doing this to us and other service providers, is we can keep doing the same stuff but more granular.
(32:28):
And I'll give you an example. Doing SKU level analysis from a profitability standpoint used to be very cumbersome from a data wrangling standpoint. AI is making that a lot easier to do. Not simple, but it's making it a lot easier to do. So I think you're going to have people like fractional CFOs and marketing agencies and things of that nature be able to provide a lot more advice around really granular things like how profitable are you on this SKU and this channel? Or like a 3PL say, "Hey, we're overstocked on this SKU and this warehouse. We should put it in this warehouse to optimize our shipping costs." So these kind of optimization questions, which have been very time intensive from a data science standpoint are going to get a lot easier and those service providers are going to be able to give you a lot more granular recommendations and insights, I think.
Izzy Rosenzweig (33:14):
Agree with you on the venture side. It was almost a curse for e-comm. Money was actually a bad thing. The correction, and to your point, the AI is giving that boost for the brands that are leaning in to be profitable because it's a great business. There's tons of demand. At Portless, we've got hundreds of brands. We help with cash flow, we help with leaner supply chain, but you must talk to Jon and Free to Grow because at the right level of scale, you got to be even more strategic on your POs and on your management. That being said, where can people find you, learn about what you do, get educated on Free to Grow.
Jon Blair (33:48):
Yeah, we're putting out a lot of content about our framework. Check me out on LinkedIn, Jon Blair, Free to Grow CFO Podcast, e-comm scaling show podcast and freetogrowcfo.com.
Izzy Rosenzweig (33:58):
Love it. Anyone on the Portless customer side, speak to your CSM, we'll get you an intro. Jon, thank you so much for being on The Modern Supply Chain.
Jon Blair (34:05):
Thanks, Izzy.
Izzy Rosenzweig (34:08):
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.