The element of time plays a critical role in any supply chain.

In fact, time is often the most significant factor in rating the efficiency of a supply chain. For instance, a factory must have parts and materials to keep production rolling and “On Time Delivery” is often a crucial deciding factor when a company is contracted to supply products to a manufacturer or vendor.

The old adage, Time = Money, holds true and might be even more pertinent today.

The idea of “On Time Delivery” permeates all supply chain discussions as buyers do not want to pay for goods before they have to, and customers have come to expect timely delivery of their orders. Large manufacturers do not want to store spare parts (both in terms of money and space), so timely delivery is critical to just about every major purchase we make as consumers.

Time of delivery has significant financial implications for both suppliers’ billings as well as for buyers paying for delivered goods and whether or not any penalties will be assessed for delinquent shipments.

That being said, the time element of every leg of a supply chain is carefully calculated, and critical hand-offs are coordinated in excruciating detail. Supply chains are much more detailed and likely longer than imagined. It isn’t just the two-day Amazon Prime schedule – those goods have been in their supply chain for weeks. There is often a mix of road, rail and water to bring goods to consumers.

Further, there are four financial concepts at work in designing an efficient supply chain:

1. Buffers
2. Velocity of Working Capital
3. Demurrage
4. FOB (Freight on Board or Free on Board)

Buffers: Are time schedules always met? The answer is no, and for that reason, suppliers build in buffers. The larger the buffer, the more of a company’s working capital is tied up for un-billed products and consequently the more money a company has to borrow to keep operating. The bigger the buffer, the longer the billing cycle.

Velocity of Working Capital: What is the Velocity of Working Capital? It’s the number of times a vendor or manufacturer turns its company’s working capital (cash) within a planning cycle. In simple terms, the sooner a vendor or supplier can bill for its product, the sooner it can collect payment (cash) to buy additional materials to manufacture. More sales equal more profits. The more cash a company generates internally, the less it has to borrow and the more profitable it can be.

Demurrage: Demurrage is a penalty/rent a shipper is charged for having goods or containers sitting in a terminal over a set time. Generally, the more demurrage incurred, the longer the billing cycle.

FOB: Often triggers a billing cycle and establishes when ownership of freight is transferred from the seller to the buyer. When shipping over water, this occurs the moment merchandise is loaded onto a vessel, not when it is at its final delivery destination. For this reason, it shortens the billing cycle. Green Shipping Line can help bring products closer to the final destination in a more environmentally friendly manner, utilizing FOB.

Time-efficient supply chains play a critical role both financially and in on time delivery of goods and parts. For both of those reasons, companies spend a great deal of planning supply chains in the hope that they will operate as drawn up.

Why is water transit so important a factor in the design of a supply chain?

Because 90% of all manufactured goods travel by water during transit from an origin to a final destination.