Pipeline inventories

Transportation inventory cost for the year is:

weekly carry rate X #weeks a shipment is in transit X Value of a shipment X #of shipments in the year

In this case Value of Shipment is the total annual shipment value divided by the # of shipments

For example for Emerson,  assume

• 12 shipments per year
• 4 week transportation time
• Inventory carrying rate of 15% per year (includes interest, perhaps damage and so on).  Note that inventory carrying cost per week = 0.15/52
• Annual shipment value = $387,464 for Lao Chiang

Then or Lao Chiang transportation inventory is  (.15/52)*4 weeks*($387,464/12)*12

I also assumed that some additional safety stock would be required to compensate for uncertainties of overseas sourcing and shipping.  I chose 2 weeks of inventory.  In other words Emerson will plan to always hold 2 weeks of inventory in the US over and above the inventory they would hold if sourcing from North America.

The value of 2 week's worth of inventory is $387,164/26weeks.  Multiply this times a carrying cost of 15% to get the cost of carrying 2 week's of inventory all year.

The transportation inventory carrying cost plus the above safety stock carrying cost is what I assume for pipeline inventory cost for Emerson.

Note that the term transportation inventory refers to inventory that is in transit. The term pipeline inventory includes transportation inventory and other inventory needed to fill a distribution system, including intermediate points.  Not all safety stocks are part of pipeline inventory, but I included them in pipeline inventory here because (a) it's simple and (b) the need for them is directly related to transportation issues.