This comes straight out of Transportation 101: A service that promises faster transit times and precisely targeted deliveries will cost more than a slower service that is not time-definite. This theory has been embraced by shippers of high-value goods who would rather spend more on transportation in order to save on the costs of carrying and storing inventory.
The shipping-inventory trade-off has long been used to compare the respective values of shipping goods by air and by water. But researchers at the Olin Business School at Washington University in St. Louis took it a step further, comparing day-definite, or expedited, full container load (FCL) ocean services with traditional FCL services that take longer to arrive and are not day-definite. They concluded that the total cost of shipping via day-definite FCL was less than that for shipping via conventional container service—even though day-definite shipments reached the end user eight days faster, on average, than cargo transported via traditional means.
Drs. Panos Kouvelis and Jian Li of the school's Boeing Center for Technology, Information, and Manufacturing compared the total annualized distribution costs of 50 high-value 10,000-kilo containerized shipments moving from Hong Kong to New York by air, by day-definite FCL, and by traditional FCL. They concluded that, on an annual basis, the total distribution cost of the time-definite service was $1.076 million, versus nearly $1.2 million for the conventional FCL service. The cost of shipping by air was nearly $2.6 million. All of the tabulations included any fuel surcharges that were applicable at the time of the study.
Drs. Kouvelis and Li found the day-definite service's higher shipping expense was more than offset by the lower inventory-related costs associated with faster product turns and the lessened need for expensive buffer inventory. The cost savings of day-definite service were even more pronounced, the researchers found, when they factored in penalties, retailers' chargebacks for late deliveries, or the need to use air freight along with a conventional FCL move to avoid a late shipment or to minimize delays.
The study was commissioned by APL Logistics, which in 2006 launched with Con-way Freight a day-definite less-than-container load (LCL) service called OceanGuaranteed. In 2008, APL entered the day-definite FCL market with service linking the United States with four Chinese ports.
Gartner, Inc.
