| > Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste. It’s not wrong per se but worded to hide the benefit. Having less skin makes it easier to take higher risk. Which means more “bad” decisions but also with higher potential. ———- While the prepayment strategy described here is interesting, I'm skeptical about some of the claims and implications. Here's why: > So how much should they discount it? So let's say we're going to buy steaks. We're going to pay $34 a pound wholesale for dry aged rib-eye, we get net-120 (normally). So I call the guy and say "I'm going to use 400 pounds of your beef a week for the next 4 months, for our menu, which is about about $300,000 of beef, what (would) we get, if we prepay you?" And he was like "what do you mean?" I'm like "I want to write you a cheque tomorrow for all of it, for four months." And he was like, "Well, no one has ever said that." So he called me the next day, he said "$18 a pound" … so … half. Half price. 1. The 50% discount seems implausibly high. Even considering the benefits of prepayment and volume commitment, typical early payment discounts in most industries range from 1-5%, rarely exceeding 10%. 2. The story implies this strategy reduces waste, but the restaurant's beef consumption remains unchanged. The butcher isn't selling more beef overall, just securing a guaranteed sale for a portion of their product. 3. While prepayment does reduce risk for the supplier and improve their cash flow (which justifies some discount), it doesn't fundamentally alter the supply-demand dynamics or the perishable nature of the product. 4. If such extreme discounts were readily available, it suggests either highly inflated initial prices or an incredibly inefficient market. In reality, these price disparities would likely be arbitraged away quickly. 5. The net-120 terms do carry risks (default risk, cash flow pressure, inventory carrying costs), but it's unlikely these factors account for such a large portion of the price. The principle of prepayment providing mutual benefits is sound, but the magnitude described here is likely overstated or oversimplified. A more realistic scenario might involve a combined discount of 20-25% at most, factoring in prepayment, volume commitment, and possible seasonal factors. This story, while engaging, highlights the importance of critically evaluating business anecdotes, even from seemingly authoritative sources. The restaurant industry certainly has room for innovation in supply chain and financial practices, but the impacts and benefits may be more nuanced than presented here. |