Inventory in transit
|Inventory in transit|
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.
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).
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.
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.
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).
- Baker, P. (2007), International Journal of Logistics Management, United Kingdom
- Baumol, W.J., Vinod, H.D. (2019), Inventory Theoretic Model of Freight Transport Demand, Informs
- Buffa, F., Reynolds, J. (1977),The inventory-transport model with sensitivity analysis by indifference curve, Transportation Journal, Vol. 17
- Jayaraman, V. (2016), Transportation, facility location and inventory issues in distribution network design, University of Southern Mississippi
Author: Iryna Vasilieva