Views: 111 Author: Site Editor Publish Time: 2022-08-25 Origin: Site
What is more important to your supply chain? Is it freight rates or transit time? Will sustainability and green development be key metrics for your business? How much have you done in supply chain planning? We believe that answering these critical questions can help you decide whether to ship by ocean or air.
Regardless of the business, data information is definitely an important part of the equation. Choosing a transportation method for your business can be a complex decision, but it is also an important step in building a successful supply chain. The more information you have, the more likely it is that your goods will arrive on time and at the best possible price. But what are the practical factors to consider when it comes to making a decision? STU Supply Chain tells you some tips.
Table of Content:
Air Freight vs Ocean Freight : How To Choose?
Sea freight is a more common choice among shippers. In fact, air freight accounts for less than one percent of the weight of goods in international trade, but is worth more than a third by value of the goods. The reasons for this are as follows.
Cost: While many factors can affect the total cost of shipping, sea freight generally has lower pricing. Shipping carriers calculate freight rates by volume of cargo or by container size (commonly 20 or 40 footers) than airlines who charge freight rates based on billed weight, which is affected by volumetric weight and gross weight.
In general, sea freight is best suited for.
Large shipments or shipments with irregular package shapes: these shipments are difficult to load and unload in the aircraft
Heavy cargo: the weight will seriously affect the billed weight
Products that are not subject to a time limit or are not prone to wear and tear
If the cargo is relatively light and small, the price difference between ocean and air freight can be closed a bit.
Environmental damage: Environmental protection is rapidly becoming a global concern and companies must begin to understand and reduce their carbon footprint.
According to the International Transport Forum, trade transport accounts for about 7 percent of global emissions. Under the "polluter pays" principle of U.S. environmental law, polluters are responsible for and pay compensation for damage caused to the environment.
"The future of low-emissions freight lies in doubly optimized policies, fuel efficiency and innovations in systems, space and data. By 2050, technology will likely contribute to a 70% reduction in CO2 emissions. The rest will be solved with other different solutions, and this is where the most potential lies. " - International Transport Forum Secretary, General Jose Viegas.
Not only is shipping cheaper, but the environmental costs are also relatively low. According to calculations by the Massachusetts Institute of Technology, long-haul air freight produces 47 times the greenhouse gas emissions per ton-mile of sea freight. Replacing a percentage of air freight with sea freight would be a simple way to reduce carbon emissions and a critical step for businesses interested in sustainability.
Speed: Air freight is certainly faster than sea freight. With sea freight, it can take up to a month for the cargo to reach the destination port and another three days to complete the unloading at the port. Depending on the transport distance, air freight generally takes only 36 hours to transport from origin to destination. The following situations would be reasons for using air freight services.
High value goods such as electronics and luxury goods: the more money a company spends on the production of the item, the faster the item will need to be brought to market to cover the cost of production
Niche or specialty products: Consumers often want to be able to purchase custom or specialty products in a short period of time
E-commerce and "fast fashion" items: Many retailers have a business model that allows them to manufacture to sell as fast as possible
Fresh, perishable goods: flowers or other perishable products must be shipped as quickly as possible
Ease and reliability: Shorter transit times mean less worry. Typically, delays can occur by sea for days, weeks or even months, and by air for much faster. If you have a shipment by air that is delayed due to weather or other factors, you will usually be supported by an alternative route or flight within 24 hours. Once the shipment is loaded on the plane, the arrival time at the destination airport is relatively easy to manage, which makes it easier for you to coordinate the delivery of the last leg.
In addition, most countries have simplified customs procedures and other paperwork requirements for airfreight. To better optimize the speed of airfreight, the process of pricing, booking and collecting documentation has become more straightforward and easier.
Next, we will compare the advantages of each of these two transportation methods for you to make a choice according to your needs.
For most businesses around the world, transportation costs are paramount. It is well known that ocean freight offers more capacity while being less costly of the two options. And air freight is faster and safer. But air freight is very expensive. For example, a package that costs $200 by sea can cost as much as $1,000 by air. That's why most professionals recommend using air freight when the cost is less than 15-20% of the value of the shipment.
That said, with ocean freight, when the package is small and less than a full container load, the cost is measured in cubic meters. In many cases, this is actually much more costly than air freight for the same package. This is why it is important to do thorough calculations and cost comparisons before choosing a shipping method.
While cost is the primary requirement, time is equally important. When it comes to time sensitivity, shipping by sea really isn't the best idea. Along with a long journey time, it's important to consider port hold-ups, customs and not forgetting weather conditions. Although there are new express shipping options, they still don't match the speed of air freight.
Air freight also promises predictability in a way that ocean freight does not. Departures and arrivals are predetermined, as are customs and border crossings. In this case, unpredictable delays are also significantly less important. Therefore, when it comes to speed, airfreight may be the better choice.
One of the key advantages of shipping by sea is that it can deliver the bulkiest of packages, hassle-free! Size and weight are areas where air freight can be limited. Air freight also comes with a long list of prohibitions and materials that are considered dangerous. For example, air freight restricts all items containing gases (such as light bulbs), all flammable items (including perfumes), all toxic and corrosive items (such as batteries), magnetic items (such as speakers), any items that pose a risk to public health, such as untanned leather, chemicals used for medicinal purposes, any packaging with a "Danger" symbol, etc. packaging, etc. This limits the use of air freight for several types of operations and makes ocean freight a more versatile option.
For goods with high requirements of timeliness, high value and light weight, air freight is the most suitable solution, such as electronic products, clothes, pants, shoes and hats, bags and leather goods, etc. (from 1kg by air).
In the case of high volume, low timeliness and low value, sea freight is a more cost-effective option, such as: heavy cargo, large cargo, machinery and equipment, air freight contraband, etc. (from 10kg by sea).
As two important means of international logistics, sea freight and air freight are well known to everyone. Air freight is expensive and fast, while on the contrary, although sea freight is cheaper, it is also slow. The obvious difference between the two characteristics also provides a basis for traders to choose.
In recent years, various factors have led to the high cost of sea freight, although also pushed up the price of air freight, but the trade-off, many originally used sea freight, also switched to air freight, the difference between the two freight even sometimes not big enough to make people feel that sea freight is cheaper.
The two biggest divisions between air freight and sea freight are price and timeliness. If you can unify the criteria for comparison, it will be easier to analyze which one is more suitable for air or sea mode.
When the time efficiency can be quantified by price, the standard will be easy to be unified.
How to quantify the time efficiency into price?
First of all, the purpose of both ocean freight and air freight is to transport the goods to the customer's requested location. And the goods in transit can be regarded as in-transit inventory. In-transit inventory naturally has a cost, i.e. inventory holding cost.
The ideal state of supply is that if demand arises, supply is immediately available to meet that demand. But this is often difficult to achieve in reality, and even JIT is only for a certain period of time. Therefore, this can be used as a division point. A simple example, when the customer places an order to generate SKU A of 500 demand, and at the same time we can not instantaneously meet the entire demand of the customer, need to place an order to the supplier, the supplier to accept our order to the delivery of these 500 SKU A to our warehouse, our warehouse can only arrange distribution, and distribution takes 3 days is acceptable to the customer conditions, as long as the warehouse has this 500 SKU A, the customer will pay and let the warehouse arrange the delivery at the same time.
If the instantaneous time is time 0 days, then it takes a total of 10 days from the time the supplier receives our order and arranges for the goods to be delivered to the warehouse to achieve the availability of SKU A. These 10 days can be considered to be the time we hold the 500 inventory of SKU A (although we may not yet start to actually own this physical inventory).
The 10-day inventory carriage cost can then be converted from time to money and used as a uniform standard for comparison.
ICC, Inventory Carrying Cost: is the cost associated with holding a certain amount of inventory. It is calculated using either the purchase price or the production cost as the standard, rather than the sales price to calculate its value. The calculation of ICC is relatively simple, as it is a percentage of annual inventory holding cost multiplied by the value of average inventory.
Inventory holding cost consists of capital costs, depreciation costs, storage costs, administrative costs, taxes and insurance.
If the annual inventory holding cost of a business is 20% and the average annual inventory value of that business is $1 million, then its annual inventory holding cost, is $1 million X 20% = $200,000.
The percentage of annual inventory holding cost varies by industry and cannot be generalized. Generally, the annual inventory holding cost is around 20% to 25%.
If the annual inventory holding cost for SKU A is $3650, shipping takes 30 days and the individual shipping cost is $2, while air freight takes only 3 days and the individual air freight cost is $15. Then it can be compared by calculation.
Ocean Freight: 3650 X 30 days/365 days + $2 = $302
Air Freight: 3650 X 3 days/365 days + $15 = $45
By comparison, although the cost of air freight is more than 7 times the cost of sea freight, but the high cost of inventory holding, it is clear that air freight greatly reduces the time of transportation, that is, reduce the inventory in transit, the cost of comparison, air freight is clearly a suitable choice. Generally speaking, the cost of holding inventory in the cost of capital (that is, the value of the goods itself) occupies a larger proportion, so this SKU A is likely to be expensive goods.
The above can actually also introduce C2C metrics to help calculate.
C2C (Cash to Cash Conversion) refers to the time required to convert raw materials or purchased items into sales revenue
Formula: C2C=AR+DOI-AP
DOI, Days of Inventory: is the number of days a company spends from the time it acquires inventory until it is sold and consumed. It is important to note that this inventory includes inventory in transit and inventory on hand, not just inventory in its own warehouse.
AR, Accounts Receivable: Refers to the amount of money received by the buyer in the normal course of business as a result of the sale of goods, products and services. This includes taxes that should be borne by the purchasing unit or the unit receiving the labor service, and various transportation and miscellaneous charges advanced on behalf of the purchaser for packaging costs. In addition, in the case of sales discounts, factors such as commercial discounts and cash discounts should be considered. Accounts receivable is a claim that accompanies the sales of an enterprise.
AP, Accounts Payable: It refers to the amount payable by an enterprise for operating activities such as purchasing materials, merchandise and receiving labor supply. It is usually a debt incurred for purchasing materials, commodities or receiving labor supply, etc. It is a liability arising from the inconsistency in time between the acquisition of materials and the payment of goods between buyers and sellers in the purchase and sale activities.
The efficiency of air freight is actually a reduction in DOI time, for example, C2C sea freight is 30 days, while air freight C2C only takes 20 days, improving the cash turnaround time by 10 days. The same can then be calculated using inventory holding costs to compare the choice of ocean freight or air freight mode.
There are many factors that have pushed up air freight prices and created capacity constraints in 2022. Don't let the same issues affect your supply chain this year: when considering air and ocean freight slots, it is recommended to choose a reliable freight forwarder, especially one with strong carrier support. These forwarders usually have access to fixed slots on major trade routes from airlines and shipping lines.
We have entered the age of data. You should choose a freight forwarder that can support you with data, so you can communicate with them online anytime, anywhere, to solve all your problems. This will help you reduce costs, make smarter decisions, and get ahead of the curve in long-term supply chain planning.
There are a myriad of factors that must be considered to determine the most appropriate mode of transportation for your shipments, and regardless of the size of your business, the key to a successful logistics solution is having a freight forwarder with a customer-focused mindset and a data-driven approach.
STU Supply Chain specializes in shipping from China to USA / Canada / Mexico / Europe or worldwide. We have the best alliances with many shipping carriers and airlines, we get lower contract rates than the market standard. This allows us to offer the most affordable freight forwarding service by sea or air freight, to be delivered safely and on time.
