Imagine the scenario. You’ve been offered a low-rate from a shipping carrier. Cheaper than you’d initially budgeted for. Sounds like a sweet deal, right? But before you decide to take the plunge, there are a few things to consider. First of all, don’t make a decision based on rates alone. Another factor – as well as reliability, quality and service – is supply chain velocity. This is important because velocity has a huge impact on both inventory costs and customer satisfaction.
How to avoid rising inventory costs
Let’s deal with inventory costs first; put bluntly, longer lead times mean higher inventory costs. The machinery and cars we carry across oceans are often high-value goods, ranging in value from USD 50,000 to many millions per unit. In fact, most breakbulk and rolling equipment cost upwards of USD 300,000 per unit.
Using USD 300,000 per unit as a base case, this means associated inventory costs of 80 USD per day. And when machines are idle, storage and maintenance costs increase, meaning a unit can easily be costing the customer more than USD 100 per day. Taking an average machine of 100 cubic meters (CBM), this means a cost of 1 USD per CBM per day.
In many instances, our competitors offer lower shipping rates but with less shipping frequency, meaning a slower time to market overall. Take this example: assuming another carrier offers monthly sailing while Wallenius Wilhelmsen Ocean (WW Ocean) offers four sailings per month (and shorter transit times), we’d be on average 14 days faster to market. That means USD 14 savings per CBM compared to our competitors in direct inventory carrying costs alone.
Shorter speed times equal happy customers
Then we get to customer satisfaction. Speed to market is hugely important for customers around the world – in the agricultural industry, for example, it’s critical that cargo is ready for seeding and harvesting within specific time frames. Delay penalties for late machines can thus be hefty.
According to McKinsey research, there’s a clear relationship between profitability and customer experience – so getting units to market 14 days slower will most likely have a negative impact on customer experience and, ultimately, profits.
What if an OEM’s machinery misses the monthly sailing schedule due to a production delay? Waiting 30 days for the next sailing just won’t work. The customer needs to know that their product will be shipped much sooner: slow supply chains aren’t an option for managers responsible for growing the top and bottom line.
When it comes to drawing comparisons between shipping rates, it’s important to take into account inventory costs and the risks associated with a slower time to market. Maybe the deal that sounded so sweet a while ago doesn’t sound quite so peachy now?