Managing inventory flow is key to managing a sustainable supply chain.
A successful ecommerce business depends on proper inventory management. Without it, it’s hard to understand how much inventory you need, when you need it, and where it should be stored to meet demand and keep costs at a minimum.
It’s easy to account for inventory that’s been purchased and received, but what about inventory that’s still in transit?
For a holistic picture of how much inventory you have in each phase of the supply chain, you don’t want to forget to account for in-transit inventory that’s been purchased.
This article explores the topic of goods in transit and how you can account for it within your overall inventory accounting process.
Let’s dive in.
What are goods in transit?
Also known as “pipeline inventory,” goods in transit refers to the amount of finished goods ordered from a supplier or manufacturer that is currently in transit and has yet to reach a physical store or distribution center.
Goods in transit refers to purchased inventory that is currently on its way to a physical store, an ecommerce warehouse, or a distribution center. Goods in transit should be accounted for similarly to what’s already on hand to provide a holistic picture of current inventory value.
Accounting for goods in transit
Managing an ecommerce business requires proper inventory valuation. This includes having full inventory visibility of all finished goods purchased — whether its inventory on hand or goods currently in the first-mile delivery or drayage phase.
Most ecommerce brands will always have goods in transit to consistently meet demand. As part of the inventory replenishment process, brands will look at inventory performance, production lead lines, transportation timelines, and warehouse receiving times to order inventory according to a specific timeline, so it’s more likely to arrive, be accounted for, and be ready for fulfillment when needed.
But to know how much it costs to ship new inventory and have it stored, you will need to determine the average shipment value. You will need to know this at the end of an accounting period or fiscal year when it’s time to report ending inventory value.
In terms of ownership of in-transit inventory, certain rules might apply. It’s important to determine whether the goods are shipped under FOB (freight on board) destination or an FOB shipping point (more on this later).
How to calculate goods in transit
To determine the cost of goods in transit per year, you will first need to calculate the average shipment value. Since it costs money to ship and store new inventory, you will first need to know the average cost of transportation, as well as your carrying cost.
Let’s say the average inventory shipment is valued at $20,000 and takes approximately 20 days to reach its destination. Assuming the cost to store each shipment is about 20% of the merchandise cost, we can figure out the average shipment value per day using the following formula:
Merchandise Cost x Carrying Cost Percentage / 365 = Average Shipment Value Per Day
$20,000 x .20% / 365 = $10.95 per day
From here, we can calculate the average cost of transportation per shipment:
Average Shipment Value Per Day x Number of Days of Transit = Cost of Transportation
$10.95 x 20 = $219
So the overall cost of goods in transit would be $20,219 per shipment.
Who owns goods in transit?
Ownership of goods in transit depends on the terms of sale. In the case of FOB destination, the seller is the owner of the goods in transit and is, therefore, liable for the shipment. But under FOB selling point, the buyer is the owner of the in-transit inventory, making them liable for the shipment.
Here is a breakdown:
- Under FOB destination, the sale takes place only after the goods reach the buyer’s destination and therefore, the title is still with the seller. That means ownership of the goods in transit still remains with the seller. Until the goods arrive at their destination, a sale or a purchase is not recorded.
- Under FOB shipping point, the sale takes place when the goods reach the shipping point and therefore, the title passes to the buyer before the goods are shipped out. That means the buyer now gets ownership of the goods in transit. The seller can record this as a sale, while the buyer records it as a purchase and accounts for the goods in its ending inventory value,
Is in-transit insurance a good idea?
Even if it’s on the buyer’s books, if any issues arise during transit (slowdowns, shipping damages, or misplacement of goods), you need to have a strong contingency plan in place. Having shipping insurance for inventory deliveries can help you reduce risk, so you don’t suffer heavy losses.
With the right in-transit insurance, you can typically get coverage for loss or damage resulting from:
- Natural disasters
- In-transit accidents
- Sinking (in case of shipment by sea)
- Derailing (in case of shipment by train)
- Accidental damages
Depending on the terms of sale, the owner of the in-transit inventory will also be responsible for getting appropriate in-transit insurance.
If the responsibility falls on you, keep in mind that you still have to pay the premium even if you don’t have to make a claim. And if you do have to make a claim, the insurance company will charge another premium to give you a payout. Some claims may also have to go through extensive and prolonged investigations, which may be time-consuming.
Stop worrying about inventory management
Since there are so many different aspects of your logistics operations that need your full attention, having to account for your goods in transit can be challenging.
You can take a huge load off your shoulders by outsourcing fulfillment and warehousing to a 3PL like ShipBob. Beyond helping you streamline your ecommerce fulfillment processes, ShipBob can help you track inventory throughout your supply chain, so can better prepare for end-of-year accounting.
Once you connect your store with ShipBob’s technology, we can work with you to strategically allocate inventory across multiple fulfillment centers to facilitate efficient and fast fulfillment. This allows you to leave all your and transit and fulfillment efforts to the experts and still be able to track real-time inventory activity from the ShipBob dashboard.
ShipBob’s fulfillment software comes with built-in tools that help you track inventory activity and trends at no extra cost. For a more robust inventory planning solution, you can integrate ShipBob’s technology with leading inventory software or take advantage of ShipBob’s Inventory API.
“We utilize ShipBob’s Inventory API, which allows us to programmatically retrieve real-time data on how many units of each product are currently stored at ShipBob’s warehouses. We currently use this API to generate custom reports to tie this inventory data into our accounting platforms.”
By providing full visibility into warehousing, inventory activity, order fulfillment, and shipping performance, ShipBob allows for a more optimized supply chain and a stronger delivery management process.
“We are very impressed by ShipBob’s transparency, simplicity, and intuitive dashboard. So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what’s leaving or entering the warehouse.
On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”
Harley Abrams, Operations Manager of SuperSpeed Golf, LLC
To get a glimpse inside ShipBob’s operations, check out the 3D experience below:
ShipBob can help you establish a more lean supply chain by taking over time-consuming logistics tasks and providing the visibility and transparency you need to optimize logistics costs and performance.
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Goods in transit FAQs
Here are answers to some of the most common questions about goods in transit.
How are goods in transit classified on financial statements?
Once purchased, goods in transit are classified as “current assets” on a company’s financial statements.
How can 3PLs manage goods in transit?
By using a 3PL like ShipBob, you can distribute your inventory across their global fulfillment network and reduce the time goods are in transit while going from the fulfillment center to the end customer while also reducing shipping costs. ShipBob also has inventory analytics that help make everything from year-end accounting reports to recording inventory much easier.
Who is responsible for goods in transit?
Depending on the terms of sale, either the buyer or the seller can be responsible for goods in transit.