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The Impact of Transportation on Inventory

Dr. H. Donald RatliffRegents Professor of Logistics

Executive Director – Supply Chain & Logistics InstituteExecutive Director – Georgia Tech Panama Logistics

Innovation & Research CenterGeorgia Tech

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Global Trade

• Impact on capital?• Impact on inventory?• Impact on transportation?

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Measuring Inventory

• A “day” of inventory = the amount of product sold in one day– Walmart average inventory = 42 days

• On Average Walmart has enough inventory “in the system” to last 42 days if no new inventory is received

• Every day Walmart sells and average of one day of inventory and receives an average of one day of inventory

3http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=wmt

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Average Value of 40ft Container of Product

• Typical Asia to US direct retail = $50,000• Furniture = $75,000• Small electronics = $300,000• Sport shoes = $1,500,000

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Inventory Cost

• Inventory requires capital– Inventory appears on the balance sheet as a capital asset– When capital is hard to get companies are forced to reduce inventory

• For logistics decisions, inventory cost is typically expressed as a percent (8% - 20%) of inventory value – A 40’ container of retail Asia/US direct = ($50,000*8%)/365 = $11/day– A 40’ container of sport shoes = ($1,500,000*8%)/365 = $329/day

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Where is the inventory?

• Inventory at retail to serve customers• Inventory at warehouse to serve retail• Inventory in-transit between manufacture and warehouse• Inventory in-transit between warehouse and retail• Where is the opportunity for Panama?

Manufacture

Port

Rail ramp

Retail

Warehouse

Display

Store and value add

Waiting Waiting

Waiting

Waiting

WaitingWaiting

Waiting

TransportTransport Transport TransportTransport

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How Transportation Impacts Inventory

• Time “in-transit”• In-transit time variability• Shipment size

Manufacture

Port

Rail ramp

Retail

Warehouse

Display

Store and value add

Waiting Waiting

Waiting

Waiting

WaitingWaiting

WaitingIn-transit In-transit In-transit

In-transitIn-transit

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In-transit Time

• Total in-transit time = time from “available to ship” to “received at destination”

• Typical components of in-transit time– Wait to receive container– Load container– Wait for truck– Transport to port– Clear paperwork– Wait for ship– Load and transport port to port– Unload at port– Clear customs– Wait for truck– Transport to destination

• May include transshipments and additional transport• How does in-transit time impact inventory? 8

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Direct Impact of In -transit Time

8 days from Europe2 days from Panama

Sourcing from Panama means 6 days less inventory in-transit

A day in-transit = a day of inventory

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Inventory

Run out point

Forecasting Demand

• Why forecast demand?• What happens when demand is not certain?

Days

Forecast

Safety stock

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Indirect Impact of Transit Time

• Forecast errors increase with time to the event– Forecast B has more information regarding inventory levels– Forecast B has more current information regarding demand trends– Forecast B requires less safety stock

Forecast B Forecast A

Forecast A

Forecast B

Additional Information

In-transit timeLess safety stock

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Indirect Impact of In -transit Time

8 days from Europe2 days from Panama

Sourcing from Panama means less safety stock at destination

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How do port calls impact inventory?

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2 days

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How do port calls impact inventory?

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3 days5 days

• Port calls add 5 days of inventory for Savannah

• Each port call has potential for delay

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Inventory

Run out point

Impact of Variability in In -Transit Time

• To assure no stock outs, must order earlier

Lead time distribution

Order point Lead time

Days

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Inventory

Run out point

Impact of Variability in In -Transit Time

• Now shipments arrive before they are needed

Days

Order point

Lead time

buffer

Average arrival point

Lead time

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Inventory

Run out point

Order point

Impact of Variability in In -Transit Time

• Variability in in-transit time increases safety stock

Lead time

buffer

Days

Average arrival point

Average safety stock

Ave days stock arrive early

Lead time

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Impact of Frequency of Port Calls

• Daily service Panama to New York transit time = 3 days• Weekly service Panama to New York transit time = 3 days

– Max time = 10 days– Min time = 3 days– Ave time = 6.5 days

• Weekly service adds 3.5 days average inventory

Time

Port call frequency

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Panama’s Current Connectivity

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http://logistics.gatech.pa

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How does transshipment impact inventory?

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3 days

2 days

5 days

Pendulum service

Bad for shipper and carrier

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How does transshipment in Panama impact inventory?

Transship service

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• Potential– Fewer multi-stop

routes– More frequency– Less in-transit time

• Significant potential to reduce inventory

• Particular opportunity for “big” ships

Direct service

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Impact of Shipment Size on Inventory

• “Cycle” inventory is approximately ½ of shipment size

Desired Order Size

Container Capacity

Inventory at Customer

Inventory at Customer

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How does warehousing in Panama impact inventory at US distribution centers?

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• Example– DCs in Savannah, Charleston,

Norfolk & NY– 10 suppliers in Asia, all with

different products– Ship in container load quantities

from each supplier to each DC– Average inventory = 0.5*10= 5

containers at each DC– Total inventory = 20 containers

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How does transshipment in Panama impact inventory?

Transship service

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• Example– DCs in Savannah, Charleston,

Norfolk & NY– 10 suppliers in Asia, all with

different products– Ship in container load quantities

from each supplier to Panama warehouse

– Ship mixed container loads from Panama to each DC

– Average inventory = 0.5*10= 5 containers at Panama warehouse

– Average inventory = 0.5*1=0.5 containers at each DC

– Total inventory = 7 containers

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Potential for Panama

• Transshipment– Increase connectivity– Increase direct lanes– Efficient handling at ports– Efficient handling between ports

• Warehousing and consolidating– Continue to improve connectivity– Improve land transportation– Improve import and export processes

• Value proposition is inventory improvement

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Comments?

Questions?