Comment by luzejian
17 hours ago
Freight rate volatility is one of the most underappreciated risks in physical product businesses. During the 2021-2022 shipping crisis, ocean freight from China to the US West Coast hit $20k+ per container — a 10x jump that wiped margins for importers who hadn't hedged. Air freight as a backup is worth keeping in your model even if you never use it; knowing your break-even point at air rates tells you a lot about product viability.
How would you model your business like this? Like what tools / literature can you recommend?
There was a lot written about this in the 1990s during the rise of globalization and just in time supply chains.
Basically, you build a big warehouse and keep it full when prices are below projection.
This is equivalent to investing capital at a negative interest rate, so it’s not done anymore. Instead, the system is designed to pass supply shocks on to the consumer when possible.
I’ve noticed the local grocery stores have started replacing shelf price tags with little computers so they can reprice food in real time. (And hire fewer stock people),
Anyway, the keyword you want is “just in time supply chain”.
> This is equivalent to investing capital at a negative interest rate, so it’s not done anymore.
Stupidity of financializing everything. There’s no amount of money in the world that can quantify the safety of having critical items like food in supply. You can’t eat money. If everyone builds “just in time” supply chains the world collapses after a single shock.
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Excel normally
You type in a normal profit and loss account, prior year might work, forecast is better. Then you see how your freight cost changes from sea to air by getting a quote from your freight company of choice. If it is 5% more then change the freight line in your p&l to be 5% higher. Are you still profitable?