Inventory in transit

From CEOpedia | Management online

Transit inventory generally points reference to the products which haven't yet delivered from one company to another. The wholesale-to-retail transaction sometimes might take a huge amount of time to take place, particularly when it includes the freighting of a big quantity of products overseas from a producer to a wholesale supplier or to a retailer. Transit inventory may generate accounting and inventory issue of concern for firms that ineffectively track items that are transported from point A to B. Goods in transit points reference to any types of inventory which have just left the shipping dockyard of the supplier, however still hasn't been arrived to the final receiving destination of the buyer. This concept also brings questions to pointing at whether the supplier or buyer has taken possession, and also which side covers the transport cost. Optimally, both should enlist goods in transit in their accounting records. Shipping cost decision and ownership are basically done by the following terms (Baker, P. 2007, p. 5-10):

  • FOB shipping point: The buyer takes the responsibility on cost and ownership when the shipment leaves the supplier.
  • FOB destination: The buyer takes the responsibility on cost and ownership when the shipment arrives to the buyer.

Ecommerce

An ecommerce supplier parcels the good to a buyer. The goods stay in the supplier's inventory up until the buyer receives the order. At this stage the products are maintained as "cost of goods sold". For instance, Company A parcels $100,000 of goods to Company B on January 2. Let's assume FOB shipping point incoterm is being used at this delivery. This term states that Company B takes responsibility of the ownership of the goods when they leave Company A's shipping yard and Company A should enlist a sale transaction on January 2. Company B should enlist an inventory receipt on January 2. Let's assume the same situation, but in this case, incoterms are now FOB destination, and the parcel doesn't arrive at Company B's receiving dockyard until February 2. In this situation, the same transactions take place, but on February 2 instead of January 2. Hence, Company A doesn't enlist a sale transaction until February. From the application perspective, the receiver may not have a manner in place in order to enlist inventory until it gets into the receiving dockyard. This creates an issue with the FOB shipping point terms, yet the sender or supplier enlists the transaction the day of shipment, and the buyer or receiver doesn't enlist receipt up until the transaction is acknowledged at its receiving dockyard. Therefore, neither of them enlists the inventory during products are in transit from the supplier to the receiver (Baumol, W.J., Vinod, H.D. 2019, p. 413-415).

Incoterms

FOB is most common incoterms but the others are (Buffa, F., Reynolds, J. 1977, p. 85-89):

  • FAS (Free Alongside) the price indicated by the supplier has all charges just up to the ship of a departure dockyard. Loading and all other cost are in now buyer's responsibility.
  • FCA (Free Carrier) this incoterm indicates that the supplier has responsibility for the delivery of the goods to destination point where the receiver has delivery operation means. The destination point could be an airport, shipping dockyard, railway center.
  • DES (Delivered Ex Ship) in this incoterm the supplier has to deliver goods to a specific shipping point, where the receiver can obtain the parcel on the arrival.
  • EXW (Ex Works) in this incoterm supplier needs to get the products ready to be parceled from its warehouse or location. The receiver's responsibility would be making all coordination for the picking and shipment of the goods. This incoterm is the most advantageous incoterm for a supplier.

Accounting

Shipping transaction type has an impact on company's accounting for that particular transaction in its books. In case producer parcels the products with FOB shipping point, which states that the company can enlist this transaction as an order at the day when it has been parceled. The opposite is valid as the arriving sight come in as the ownership-transfer point. In this situation, the supplier must stand by as the receiver expects ownership at the arriving point. It is important for the specific accounting transactions type, particularly in case that it brings forth the transaction triggered in one month and to happen in the next.

Financing

Stocks in transit might be important for the financing topics. In particular situations, a receiver may presume to use the products that has been purchased as deposit and leverage them to finance other business operations. Creditors, who are considering that such products will be obtained in particular time frame and in the amount listed, must pay attention to complete their due care to make sure the loan receiver gets his acts together; or else the creditor might face the risk of borrower's payment failure and high potential for the loan default (Jayaraman, V. 2016, p. 471-473).

Examples of Inventory in transit

  • Raw Materials: Raw materials are materials that are used in the production of goods and services. For example, a manufacturing firm may need to transport raw materials from China to the United States in order to produce their goods. This raw material inventory in transit would be considered inventory in transit until it is received by the firm and put into production.
  • Finished Goods: Finished goods are goods that are ready to be sold to customers. For example, a retail store may need to transport goods from a manufacturer in India to their store in the United States. This inventory in transit would be considered inventory in transit until it is received by the store and put on the shelves.
  • Consumer Goods: Consumer goods are goods that are purchased by consumers directly. For example, an online retailer may need to transport goods from a manufacturer in China to their customers around the world. This inventory in transit would be considered inventory in transit until it is received by the customer.
  • Components: Components are parts that are used to assemble products. For example, a technology firm may need to transport components from multiple suppliers in different countries to their factory in the United States. This inventory in transit would be considered inventory in transit until it is received by the factory and used in the production process.

Advantages of Inventory in transit

Inventory in transit is a useful tool for businesses that need to manage their inventory, as it offers a range of advantages. These include:

  • Greater flexibility and agility in responding to customer demand - By having inventory in transit, businesses can respond to customer demand more quickly, allowing them to meet customer expectations.
  • Improved ability to manage inventory levels - By having items in transit, businesses can better manage their inventory levels. This allows them to avoid overstocking and understocking, which can lead to lost sales and wasted resources.
  • Cost savings - By having items in transit, businesses can reduce their costs associated with storage and warehousing. This can help them to remain competitive in their industry.
  • Improved customer service - By having items in transit, businesses can provide better customer service. This can help them to build customer loyalty and trust, which is important for long-term success.

Limitations of Inventory in transit

  • The biggest limitation of inventory in transit is the lack of visibility. Companies are unable to track their goods in transit and cannot monitor their progress which results in delays and an overall reduction in efficiency.
  • Another limitation is the potential for theft or damage, as there are no safeguards in place to protect the goods. This can lead to further delays and an increased cost to the companies involved.
  • Inventory in transit can also lead to an increase in inventory costs due to the extended holding periods. This is because the goods are often held in warehouses or other storage facilities for extended periods of time, which increases the cost of inventory management.
  • Finally, the lack of communication between the shipper and the recipient can lead to confusion and miscommunication, which can result in delays and ultimately, a decrease in customer satisfaction.

Other approaches related to Inventory in transit

Inventory in transit is an important concept to understand when managing a business' stock. There are several approaches that can be taken to effectively track and manage items that are in transit. These include:

  • Implementing an automated inventory management system: Automating the inventory management process can help to more accurately track and record inventory in transit. This type of system also helps to minimize human error and provides real-time updates on the status of items.
  • Utilizing tracking numbers: By providing tracking numbers for shipments, businesses can ensure that they have an accurate record of when items have been shipped and when they are expected to arrive.
  • Utilizing EDI systems: Electronic Data Interchange (EDI) systems provide a secure way to transmit and track orders, helping businesses to quickly and accurately manage their inventory.
  • Working with reliable suppliers: Working with reliable suppliers who can provide accurate and timely information about shipments can help businesses to more accurately track their inventory in transit.

In summary, there are several approaches that can be taken to effectively track and manage inventory in transit. Automated inventory management systems, tracking numbers, EDI systems, and reliable suppliers can all help businesses to more accurately manage their inventory.


Inventory in transit — recommended articles
Contract logistics — Direct delivery — Added value (logistics) — Ordering cost — Inventory system — Distribution logistics subsystem — Net purchases — Integrated supply chain — Operating supplies

References

Author: Iryna Vasilieva

Retrieved from "https://ceopedia.org/index.php?title=Inventory_in_transit&oldid=93448"