Lessons · Lesson 3 of 6
Freight is money; days are cash
Why a lead time is paid for twice, what one day of it is worth on a line you sell every week, and the place where the calendar quietly changes the answer.
Lesson 3 of 6 · 19 min
Two numbers that arrive together and behave differently
Every quotation Marek collected carried a freight rate and a transit time. They came in the same email, so they get treated as one fact about distance. They are not one fact. A freight rate is charged once, on a bill, in a currency, on a date. A day is charged continuously, to somebody who never sends an invoice for it.
The World Bank scores countries on logistics and deliberately keeps timeliness apart from cost, because a country can be good at one and poor at the other. Osbern's four candidates happen to line up: the shortest haul is also the cheapest freight. That is a coincidence of this route map, not a rule. The moment you treat the two as one thing, you stop being able to see the case for a dearer origin.
A day is paid for twice
Lesson 1 already charged for part of the calendar. That was the cash in transit column, which runs from the day Osbern pays at the origin to the day the container reaches its warehouse. It is the smaller half.
The larger half never appears in a landed cost at all. BP-140 is a continuity line: it sells every week and it must not run out, so Osbern holds stock. How much stock is set by the lead time. A reorder placed today does not arrive for a lead time, and everything sold in between has to already be on the shelf. Osbern's planning team states its rule in one sentence: hold cover for the replenishment lead time plus two weeks. It is a conservative rule and it is Osbern's own. Your planner will have a different one. The shape is the part that travels: cover grows with lead time, in every rule anybody uses.
Weekly demand on this programme is 4,615.38 units. Multiply by the cover weeks, value it at the origin's own landed cost, and charge it the same 9.0% Osbern charges every other pound of its money.
| Bangladesh | Vietnam | Egypt | Turkey | |
|---|---|---|---|---|
| Lead time, weeks | 17 | 18 | 14 | 11 |
| Cover held, weeks | 19 | 20 | 16 | 13 |
| Cover held, units | 87,692 | 92,308 | 73,846 | 60,000 |
| Cost of holding it, a year | 38,179.69 | 42,184.11 | 31,439.57 | 27,682.02 |
| Landed cost, a year | 1,161,024.00 | 1,218,648.00 | 1,135,320.00 | 1,230,312.00 |
| Total, a year | 1,199,203.69 | 1,260,832.11 | 1,166,759.57 | 1,257,994.02 |
The place the ranking moves
Look at the bottom two rows for Vietnam and Turkey.
On landed cost, Vietnam is 11,664.00 a year cheaper than Turkey. On the total, Turkey is 2,838.09 a year cheaper than Vietnam. Nothing about either factory changed between those two lines. Vietnam's lead time is 126 days against Turkey's 77, and the seven extra weeks of stock that difference obliges Osbern to own cost more than the freight and duty advantage that had put Vietnam ahead.
The calendar also widens the gap at the top rather than narrowing it. Egypt beat Bangladesh by 25,704.00 on landed cost. Once cover is charged, it beats it by 32,444.12, because Bangladesh's longer lead time obliges 6,740.12 a year of extra stock.
That is the honest summary for a line you sell every week: the calendar reshuffles the bottom of the table and confirms the top of it. It is a second-order effect here. Do not conclude that it is second-order everywhere, because lesson 4 is the same four factories with the effect many times larger.
What a single day is worth
The useful form of all of this is not a total. It is a rate, because a rate is what you use when a factory asks for four more days, or an ocean carrier offers a faster service for a surcharge.
Take Egypt. One extra day of lead time adds one day of demand — 657.53 units — to the cover Osbern must hold permanently. At a landed 4.7305 and 9.0%, that is 279.94 a year, which on the programme is 0.001166 a unit.
One extra day of transit costs that, and costs the cash column as well: 4.72 of customs value at 9.0% for one day out of the year is 0.001164 a unit. A transit day is a lead-time day that is also spent on the water, so it costs both.
- a day of factory lead time: 0.001166 a unit
- a day of ocean transit: 0.002330 a unit
Twice as much. And now you can answer the question. A carrier offering to take four days out of the transit for a surcharge is worth up to 0.0093 a unit on this programme, and no more. Somebody will quote you three times that.
Check yourselfBangladesh's cover costs 38,179.69 a year and Turkey's 27,682.02. Why does the origin with the far more expensive stock still finish ahead?Show the answer
Because cover cost is the smaller of the two terms, and it is being asked to overturn the larger one. Turkey's stock advantage is worth 10,497.67 a year, and it is chasing a landed-cost deficit of 69,288.00. Turkey's FOB is 0.95 a unit above Bangladesh's, and 0.95 on 240,000 units is not recoverable in stock. Against Vietnam the same advantage wins, because the deficit there is only 11,664.00. The rule is not "short lead times win". It is "a day is worth an amount you can compute, and you compare it to the gap it has to close".
Two things the calendar buys cannot be priced this way, and pretending otherwise is worse than leaving them out. A short lead time buys the ability to react: to reorder inside a season, to fix a colour that is selling and stop one that is not. A long pipeline buys more exposure, because there is more of your money in more places when something goes wrong. Neither is zero. Both should be written in the file as unknowns with a question against them, never as a blank that a reader will read as nothing.