Thursday, October 06, 2005

The price of foam

On of the more obscure problems Katrina caused is a shortage of foam used in upholstered furniture. Thankfully, Select Comfort's business model allows them to sell beds now and ship them later, so with careful management it should be possible to avoid lower sales if not fewer deliveries. If the average delivery time goes up only a few days, consumers might not even notice or care.

The principle of supply and demand might cause problems in the long term, however. If foam is in short supply over the next few months, companies that need it will bid up the price in order to ensure they have enough to finish their own products. Until the supply problem is fixed, Select Comfort is at risk of lower profit margins.

Company-specific risks like this are hard to predict unless you have a detailed understanding of the micro-economics of an industry. Even then, the unexpected happens more often the we think. But good companies with solid capital structures and competent management will survive.

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