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Financial consequences of late shipments

This ESCIMCO-Insight will elaborate on the financial consequences that late shipments have, and what value can be achieved in reducing them.

On Time Delivery

OTD is a metric that is predominantly used by companies delivering goods to customers. The metric is a good identifier to see how your internal and customer facing supply chain is performing.

Knowing the OTD-score can help companies to determine whether they need to take corrective actions in their Supply Chain to improve their customer satisfaction. Setting the targeted OTD-level can be done by comparing OTD-score with competitors and/or verifying with customers.

The OTD-metric measures the delivery performance against an agreed delivery timing. This agreed delivery timing can be defined in a number of different ways. ‘On-time’ can mean that the goods were delivered:

  • Within a certain number of days before or after the agreed upon date
  • On the agreed date itself
  • On the agreed date within the specified delivery window during that day

The actual timing of delivery is captured in a Proof of Delivery (POD). This is when the delivery person hands over the goods to the receiver. The delivery person then lets the receiver acknowledge that they have received the goods. Acknowledgement is mostly executed via a digital signature, but sometimes a signed delivery document serves as a POD.

The OTD-metric is mainly used in a B2C-environment, where digitalisation rates are high.

On Time Shipment

An increasing number of companies uses the POD to determine wether the goods were actually delivered ‘on-time’. Many companies however use a different method, which is less exact but good enough for many businesses.

These other companies use the actual ship date (ASD) to determine something related to the OTD-performance: the On-Time Shipment (OTS)-metric. The advantage for these companies is that they do not need to ‘wait’ for the transportation company, that delivers the goods, to provide the POD-information to them.

The information needed to collate the results is readily available in their ERP-system. Using their Logistics Service Provider’s transit time to deliver the goods to their customers helps them to determine when the goods need to ship from their premises: the required shipment date (RSD).

Comparing the ASD with the RSD determines the OTS-score. Of course the OTS-metric can not be as exact as the OTD-metric, whereby the receiver acknowledges the actual receipt.

This OTS-metric is mainly used in a B2B-environment where digitalisation rates are relatively low. With the growing digitalisation rates in the B2B-environment an increasing number of companies are transitioning to, or are adding on the OTD-metric.

Lateness

While understanding the OTD- and/or OTS-levels, companies should also understand the magnitude of shipping late. The magnitude refered to is the number of days the goods were shipped late, defined here as: shipment lateness.

Generally when goods are shipped they are automatically invoiced. The ERP-system will recognise the moment that the shipment is closed as the time that the invoice needs to be generated and sent to the customer.

Note that constructions exist whereby a full payment or a part of that payment has to be completed before a shipment is made, or even the assembly of the goods takes place. In this ESCIMCO-Insight we will only consider the situation where invoicing takes place upon shipment of the goods and no prepayments are required.

When an order is shipped late, this means that the invoice is sent late. On the invoice is the actual invoice date and thus for customers ‘the clock only starts ticking’ from that invoicedate. Customers will pay according to agreed payment terms, which means that companies will receive their money the same number of days later as the shipment lateness. During this shipment lateness period companies require capital to cover the cost they make to operate. The higher the average shipment lateness is, the more capital a company requires.

Generally companies acquire capital in form of loans from banks, investors or owners. All these institutes expect to see an increased return on the capital they have provided to companies, which is why they lend out the capital against a certain intrest. Intrest payments are done throughout or accumulate over the lending period. The higher the capital loan required the more intrest is due.

When goods are shipped late there are two resulting financial implications:

  • Capital requirements, and
  • Intrest cost

Managing OTS-scores and shipment lateness will allow you to impact these two financial implications.

Example

Let’s take the above insights and see how this financially impacts a virtual company.

For this example we use a mid-size company that has an annual revenue of 500.000 k€ and has acquired capital at an average intrest rate of 10%.
The company invoices at the time of shipment and has an OTS-performance of 90%. The average lateness is 10 days. Shipments are done 250 days per year.

Based on customer and competitor analysis the company targets an OTS-performance of 95% while lateness is reduced to 5 days. What is the financial impact of the virtual company?

Current situation:

500.000 k€ annual revenue / 250 shipment days = 2.000 k€ revenue /day

2.000 k€ revenue / day x (100% – 90%) = 200 k€ revenue / shipment day late

Capital required: 10 days lateness x 200 k€ revenue / shipment day late = 2.000 k€ as a result of lateness

Intrest on Capital required: 10% x 2.000 k€ = 200 k€ per year

Targeted situation:

500.000 k€ annual revenue / 250 shipment days = 2.000 k€ revenue /day

2.000 k€ revenue / day x (100% – 95%) = 100 k€ revenue / shipment day late

Capital required: 5 days lateness x 100 k€ revenue / shipment day late = 500 k€ as a result of lateness

Intrest on Capital required: 10% x 500 k€ = 50 k€ per year

Changing from the current situation to the targeted situation means that the virtual company requires 1.500 k€ less capital for lateness, which can translate in a one-off savings.
As a result of requiring less capital the virtual company also has a reduction of 150 k€ intrest payments per year, which are on-going savings.

Summary

Companies look at the OTD-metric to gauge customer satisfaction in terms of on time deliveries. Two related measurements to the OTD-metric, which look at the late deliveries, are equally important and identify the financial impact that late shipments have.
Influencing the late shipments can generate positive financial impacts in cash and operational cost.

Interested in knowing more? Contact us now …

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