Surprising: is urgent freight a way of reducing logistical costs?

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March 06, 2014  |   Blog,Etude de cas   |     |   Comments Off on Surprising: is urgent freight a way of reducing logistical costs?

manager finding out a good ideaThe claim may seem surprising, but occasionally making use of urgent freight services may help a logistics manager lower his costs in interesting ways:

The amount of spare stock is a relatively high cost for an industrial site,
due to the immobilized capital they represent, not to mention the costs of storage, the depreciation of the stored resources and the risk of inventory being left unsold.

However, it’s necessary to store some stock as a buffer, to guard against
interruptions in production and to avoid late deliveries to clients. That
said, would it not be possible to reduce the amount of stock held in
reserve, to reap substantial savings?

This question becomes even more important in times of economic slowdown – the stock must be reduced, but at the same time the company has to be ready for a sudden surge in demand, so that it doesn’t miss a market opportunity, or the chance to resume production as before.

Reduce delivery times to be able to reduce the stockpile.

supply chain managment air time critical emergency freight services 24hoursThe question is now, how to reduce the stockpile, while remaining capable of reacting to market conditions at short notice? The answer lies in the reduction of time necessary to deliver crucial materiel and thus reduce the time it takes to deliver to clients:

 Your stock alerts are configured around the time it takes to deliver materiel, either from your suppliers or to your clients. For example, 10 days for an airfreight delivery from Asia, 3-5 days from the United States…

Could you reduce your stockpile to 3 or 5 days?

What would happen if you were able to reduce the time it took for deliveries? Wouldn’t your necessary stockpile be considerable reduced? Would you still need 10 full days of stock, if you could have an urgent consignment delivered within 36 hours, from your supplier in Shanghai? Couldn’t you reduce your stockpile to 5 days, or even 3?

 Yes you could! link But surely an urgent freight service capable of delivering a consignment from Asia in less than 36 hours is prohibitively expensive? Could that still be worth it?

A calculated cost?

Could relying on urgent freight services really allow me to reduce my stockpile management costs enough to make it financially worth it?

If so, how?

  • First of all, it’s not necessary to deliver a complete package all at once with an urgent freight service. Only those pieces which you really need are delivered urgently, all the other pieces which aren’t crucial for production to immediately resume can be sent by normal freight. Thus the amount which is sent by urgent freight is small.
  • Secondly, the cost of stock is frequently underestimated and could be a significant amount over the year. Far preferable would be the occasional cost for urgent freight, which would allow you to streamline the production process and work so that demand determines supply, and not the other way around.

What sort of ROI does this offer? A numerical example.

urgent express logistic what costs what ROI Air Time CriticalNumbers often speak better than words: let’s imagine a company which decides to hedge against the unpredictable, and let’s call this company A.

They keep a stockpile sufficient to guard against all kinds of unforeseen circumstances.

Company A(+) on the other hand opts for a more innovative method, and decides to reduce its stockpile, making significant savings, and occasionally rely on the services of an urgent freight service.

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Let’s evaluate their annual costs:

Company A (higher stockpile)
– 100,000 pieces at €100 each: a combined cost of €10,000,000 p.a. which is immobilised
– Annual costs of financial immobilisation (4%) : €400,000
– Costs of urgent freight: None
= Total Costs: €400,000

Company A(+) (reduced stockpile)
– 50,000 pieces at €100 each: a combined cost of €5,000,000 p.a. which is immobilised
– Annual costs of financial immobilisation (4%) : €200,000
– Costs of urgent freight: €60,000 (corresponding to 5 Air Charters or 15 Next Flight Out services, on average)
= Total Costs: €260,000
*******************************************************************************************

With this example it becomes clear that Company A freezes its assets, in the form of an immobilised stockpile, which costs €400,000 a year to manage. Company A(+) on the other hand has a total cost of €260,000 per year, including urgent freight costs, even though it faces more uncertain situations. A saving of €140,000 a year.

€140,000 saved!

Company A+ keeps €140,000 of available cashflow for other projects: perhaps new logistical management software to be even more efficient in the future. Perhaps more R&D, hiring very qualified new staff, SAP or EDI trainings? New commercial sites to capitalise on new market opportunities?

 Whatever they choose to spend the money on, the fact remains that they have more opportunities than Company A, due to more cashflow which is freed up.

Conclusion: stockpile reduction + increased reactivity = SAVINGS

Shortening delivery times allows you to reduce your stockpile and make large savings. The costs of the urgent freight is offset by the reduction in stockpile and the corresponding financial savings, which can be used elsewhere.

The urgent freight service, far from its low reputation, can be a superb tool, which allows the manager to manage his logistics more closely and make substantial savings, with modern methods that make use of 0 stocks and Just-In-Time production.

For more information: http://airtimecritical.com/

Want to schedule a time to discuss opportunities? ops@airtimecritical.com

Contact us in an emergency, 24 hours a day, 7 days a week : +33 – 1 78 90 26 52

 

This post is also available in: French

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