0 Replies Latest reply on Feb 21, 2017 3:45 AM by mediterranean1

    FREIGHT COST VS. IN TRANSIT INVENTORY: BASICS OF FINANCE AFTER INTEREST RATE INCREASES

    mediterranean1 Novice

      The general approach on freight payers’ side whether shipper or consignee has been to focus on unit transport cost rather than total logistics costs. I can’t comment on USA practice however at least in Mediterranean and Middle East area freight payers’ practice is somehow to evaluate different transport and service options based on unit freight cost only.

       

      This approach has many shortcomings and indeed ignoring basics of not only logistics management but also essentials of finance.

      Peeters et.al (1995)* have long ago emphasized the importance of transit time on total logistics costs:

      “Generally, time-related costs can be expressed by the following formulas:

      Time costs = interest on the value goods, depreciation during transport

      Total logistical costs =transport cost (freight, handling, storing etc.) + time costs.”

       

      The way of measuring time cost eventually related to capturing data about in transit inventory first. If freight payers are aware of in-transit inventory ( goods shipped and invoiced by suppliers but not received by consignee) then they would be able to quantify the cost of capital tied to in transit inventory.

       

      Because of a low cost of capital ( fed by significantly reduced interest rates) until recently in transit inventory and cost of capital buried in it has received little attention. That's why carriers felt free to extend transit time by adding more ports of call or to apply slow steaming.

       

      Now interest rates are in the course of increase and freight rates will also be higher due to oil price hikes plus capacity decreases of container carriers, by next year we will need to reconsider the true cost of logistics activities.

       

      To my experience, freight payers need to calculate inventory carrying costs not only for the inventory held as safety stock ( due to longer transit time) but also for the inventory being in transit. Eventually, longer transit time means more inventory in the pipeline which in turn means higher cost of capital tied within in transit inventory.

       

      For those having an interest in the subject , I would love to discuss further based on emprical studies.

       

      * Peeters, C., Verbeke, A., Declercq, E. and Wijnolst, N. (1995): Analysis of the Competitive Position of Short-sea Shipping (Delft, Delft University Press),  Chapter III, p.15