What is In-Transit Inventory? A Detailed Guide
Keeping track of how much inventory, including those shipped by your supplier but yet to arrive in your warehouse, you have at hand is vital for the success of your business. Tracking this in-transit inventory can sometimes be tricky and can lead to costly errors if not managed properly.
In this post, we will explore the concept of transit inventory to help you understand what they are all about. In addition, we will share insights to manage them efficiently.
What Really is In-Transit Inventory?
How do you define transit inventory? In-Transit inventory, also known as pipeline inventory, refers to goods that are currently in the process of being transported from the manufacturer’s facility to the retailer or supplier location.
This type of inventory is significant because it represents products not yet available for sale but are on their way to becoming part of the retail stock.
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Why Does In-Transit Inventory Matter?
In-Transit inventory is crucial for several reasons:
Continuous Supply Chain Movement: This represents a vital link in the supply chain, ensuring that there is a continuous flow of products from production to sales points.
Demand Fulfillment: By effectively managing transit inventory, retailers and wholesalers can better predict and meet customer demand.
Financial Implications: Since transit inventory ties up capital, effective management is essential to maintain financial health and cash flow.
Pipeline Inventory Formula
Having an idea of how much handling in-transit inventory costs will help you price your products better for optimal profit. So how do you calculate pipeline inventory?
First, you need to determine the average shipment value per day. This is calculated by multiplying the value of the inventory in transit by the carrying cost (the cost of storing the inventory while in transit) and dividing by 365.
So, let’s say you waiting to receive $10,000 worth of inventory that has been shipped and the carrying cost is 15%. The average inventory shipment value per day will come out as follows:
Average shipment value per day = 10000 x 0.15 /365
This equals $4.1.
If it takes an average of 2 weeks (14 days) to receive these items, the total shipment value will come out at $57.53.
In all, you would spend $10,057.53 on that transit inventory.
7 Ways In-Transit Inventory Impacts Supply Chain Management
Bridges Production and Sales
In-Transit inventory acts as a crucial bridge in the supply chain, linking the production of goods with their eventual sale. It ensures a steady flow of products from manufacturers to retailers, enabling businesses to maintain consistent stock levels.
Enabling Continuous Supply
For retailers, especially in fast-paced sectors like fashion, having a constant supply of products is essential. In-Transit inventory allows for a continuous replenishment of stock, ensuring that stores can cater to the ever-changing demands of consumers.
Balancing Supply and Demand
In the world of retail, demand can fluctuate rapidly. In-Transit inventory plays a critical role in balancing these fluctuations. By having goods in transit, retailers can quickly respond to changes in consumer demand without the need for excessive stockpiling.
Reducing Lead Times
One of the key benefits of effectively managed transit inventory is the reduction in lead times. By optimizing the transportation and logistics processes, businesses can ensure that products reach the shelves faster, enhancing customer satisfaction.
Inventory Management and Forecasting
Proper management of in-transit inventory is crucial for accurate inventory forecasting. It enables businesses to predict when new stock will arrive and plan accordingly, thus optimizing their inventory levels.
Cost Management
Transit inventory can also impact cost management. Efficiently managed transit inventory can reduce storage costs and minimize the risk of overstocking or stock obsolescence.
Risk Mitigation
In-Transit inventory involves various risks, including delays, damage, or loss of goods. Effective management of transit inventory involves strategies to mitigate these risks, ensuring the smooth flow of goods through the supply chain.
Challenges in Managing In-Transit Inventory
Managing transit inventory is not without its challenges. These include:
1. Tracking and Visibility
Challenge: Keeping track of goods that are constantly on the move is inherently complex. Traditional tracking systems may not provide real-time updates, leading to a lack of visibility into the exact location and status of transit inventory.
Impact: Without accurate tracking, businesses can face difficulties in predicting stock availability, leading to potential stockouts or overstocking at retail outlets.
2. Logistic Delays and Disruptions
Challenge: Transit inventory is susceptible to delays due to various factors such as weather conditions, transportation issues, or customs hold-ups.
Impact: These delays can disrupt the supply chain, leading to late deliveries, dissatisfied customers, and potential loss of sales.
3. Risk of Damage or Loss
Challenge: Goods in transit are at risk of damage due to handling and transportation conditions. There’s also the risk of loss due to theft or misplacement.
Impact: Damaged or lost items can lead to financial losses and require additional time and resources to replace.
4. Cost Implications
Challenge: Transit inventory involves various costs, including transportation, insurance, and storage fees during transit stops.
Impact: These costs can add up, affecting the overall profitability of the product and necessitating careful budgeting and cost control.
5. Compliance and Regulatory Issues
Challenge: Different countries and regions have varying customs regulations and documentation requirements, which can be challenging to navigate.
Impact: Non-compliance can result in delays, fines, and additional costs, complicating international supply chains.
6. Environmental Concerns
Challenge: Transportation of goods, particularly over long distances, has environmental implications, including carbon emissions.
Impact: There is increasing pressure on businesses to reduce their carbon footprint, requiring more sustainable logistics solutions.
7. Dependence on External Factors
Challenge: In-Transit inventory management often depends on external parties such as shipping companies, logistic providers, and customs authorities.
Impact: Any inefficiency or error on their part can directly affect the supply chain, over which the business has limited control.
In Transit Inventory Ownership: Who Owns In-Transit Inventory?
Should an inventory get damaged while in transit, you would be responsible for the damage: you or your supplier? To answer this question, let’s dig into key concepts you need to keep in mind.
Manufacturer vs Retailer/Wholesaler Ownership
The ownership of transit inventory typically depends on the terms of the sale and the shipping agreements between the manufacturer and the retailer or wholesaler.
Shipping Terms Influence
Common terms like Free On Board (FOB) Destination and FOB Shipping Point play a crucial role in determining ownership.
In FOB Destination, the manufacturer owns the inventory during transit, transferring ownership to the buyer only upon delivery. Whereas from the FOB Shipping Point, ownership transfers to the buyer as soon as the goods leave the manufacturer’s premises.
Risk and Responsibility
Along with ownership, the risk and responsibility for the inventory also transfer. This includes the risk of loss or damage during transit.
Insurance coverage is often influenced by who owns the inventory at a given point in the transit process.
Impact on Accounting and Inventory Management
The ownership status of transit inventory impacts how companies account for these goods in their financial statements and inventory records.
Retailers and wholesalers need to account for goods in transit that they own, which can be challenging without real-time tracking systems.
The Role of Third-Party Logistics (3PL)
When third-party logistics providers are involved, they handle the transportation but do not own the inventory. Their role is limited to logistics and transportation management.
International Transactions and Ownership
In international transactions, customs and import/export regulations can further complicate the ownership of transit inventory.
The terms of international trade agreements, like Incoterms, specify ownership, risk, and responsibility in international shipping.
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Best Practices For In-Transit Inventory Management
Effective management of your pipeline stock is key to ensuring a smooth and efficient supply chain. Here are some best practices to consider:
1. Conduct Regular Inventory Audits
Regular audits are essential to identify and address discrepancies between the physical inventory and the recorded data. These audits help in keeping track of the transit inventory accurately. By ensuring the data matches the physical stock, businesses can make more informed decisions and avoid issues like stockouts or overstocking.
2. Implement Cycle Counting
A cycle counting program, as opposed to full physical inventory counting, minimizes disruptions and provides continuous monitoring of inventory accuracy. This method involves regularly counting a small portion of the inventory. Continuous monitoring helps in maintaining accurate inventory records and quickly identifying and addressing discrepancies.
3. Use Real-Time Data Tracking
Leveraging inventory management software for real-time tracking ensures that inventory data is always current, thereby reducing inaccuracies caused by delayed data entry.
4. Train Staff on Inventory Management Best Practices
Training your staff on the right inventory management strategies can also go a long way in improving your processes.
Well-trained staff can efficiently manage inventory, identify potential issues early, and contribute to the overall smooth operation of the supply chain.
5. Foster Strong Supplier Relationships
Building strong relationships with suppliers can improve communication and lead to better coordination and efficiency in managing transit inventory. Good supplier relationships can lead to preferential treatment during peak periods and better support during supply chain disruptions.
6. Leverage Technology for Enhanced Visibility
Utilize advanced inventory management systems that provide enhanced visibility into the entire transit process, including tracking and forecasting.
Increased visibility aids in better demand forecasting, reduces the risk of errors, and improves overall supply chain efficiency.
7. Optimize Inventory Levels
Maintain optimal inventory levels by balancing the need to meet customer demand without overstocking, which ties up capital and resources.
Optimized inventory levels help reduce carrying costs, increase inventory turnover, and improve profitability.
8. Plan for Contingencies
Have contingency plans in place for potential disruptions in the supply chain, such as alternative transportation routes or backup suppliers.
Being prepared for disruptions ensures that the supply chain remains resilient and capable of adapting to unforeseen circumstances.
Conclusion
In conclusion, transit inventory plays a critical role in the apparel industry’s supply chain. Effective management of this inventory type is essential for ensuring that the latest fashion reaches the market in a timely manner.
By applying some of the tips we’ve shared here, you can overcome the challenges of transit inventory management, ensuring efficiency and customer satisfaction.