Most businesses treat freight and inventory as separate budgets managed by separate people. That is a mistake, because they are two sides of the same equation. Every day of transit time you remove from your supply chain reduces the amount of stock you need to hold to protect your service level. Domestic air freight costs more per kilo, but it can pay for itself many times over in lower inventory, less warehouse space and fewer write-offs.
This article shows how to quantify that trade-off. It sits within our guide to optimising your business supply chain using domestic air freight, which covers the wider strategy.
Why lead time drives inventory
Businesses hold inventory in each location for three reasons:
- Cycle stock: the stock you use between replenishment deliveries.
- Safety stock: the buffer that protects you from demand spikes and late deliveries during the replenishment lead time.
- Pipeline stock: goods you own that are sitting on a truck, train or plane.
All three depend on lead time. The longer and less predictable the lead time, the more cycle, safety and pipeline stock you carry. On Australian lanes, the difference between road and air can be four or five days each way on the longest routes, which is a large amount of stock across a whole range. Our comparison of domestic air freight and road freight sets out typical transit times.
How faster freight reduces safety stock
The standard formula most planners use for safety stock, when lead time is fairly consistent, is:
Safety stock = Z × σd × √L
Z is the service factor (about 1.65 for a 95 per cent service level), σd is the standard deviation of daily demand, and L is the lead time in days.
Because lead time sits under a square root, the relationship is not linear, but the effect is still powerful. Cutting lead time from five days to one reduces safety stock by more than half.
A product sells an average of 200 units a day in Perth, with a daily standard deviation of 40 units. The business targets a 95 per cent service level (Z = 1.65). Each unit costs $150.
By road (5-day lead time): 1.65 × 40 × √5 = 1.65 × 40 × 2.236 = 148 units
By air (1-day lead time): 1.65 × 40 × √1 = 66 units
Difference: 82 units, or $12,300 of stock that no longer needs to sit in the Perth warehouse.
If holding costs run at 25 per cent of inventory value a year, that is about $3,075 a year saved on one product in one location. Multiply across a range of fast-moving lines and several branches, and the numbers become significant.
Lead time variability matters too. A road journey that sometimes takes four days and sometimes seven forces you to hold more buffer than one that reliably takes five. Air freight usually has lower variability on long lanes, which reduces safety stock further.
The pipeline stock you are paying for
If you own goods while they are in transit, every day on the road ties up cash. Pipeline stock equals average daily demand multiplied by transit time. In the example above, cutting four days of transit on 200 units a day removes 800 units, or $120,000 at cost, from the pipeline. That is working capital you can use elsewhere, although it only applies to stock you own in transit, such as transfers between your own sites.
Holding costs are bigger than most people think
When businesses compare freight options, they often count only the warehouse rent. The true cost of holding inventory usually includes:
- capital tied up in stock, valued at your cost of finance
- warehouse space, racking, utilities and labour
- insurance and stocktake costs
- damage, shrinkage and theft
- obsolescence, expiry and markdowns on stock that does not sell in time
Many planners use an annual holding cost of 20 to 30 per cent of inventory value as a starting point. For fashion, technology and short shelf-life products, the real figure can be much higher because of markdowns and write-offs.
Fewer warehouses, not just less stock
The biggest opportunity is sometimes structural. Many Australian businesses keep stock in several capital cities because road transit to Perth, Brisbane or Hobart is too slow from one central site. Domestic air freight can make it possible to serve those markets from fewer locations.
A well-known planning rule, the square root law, suggests that total safety stock falls roughly with the square root of the number of stocking locations. Consolidating from four warehouses to one could, in theory, halve total safety stock, before you count savings on leases, staff and duplicated systems.
This is the model many online retailers now use. Our article on domestic air freight for ecommerce explains how they serve the whole country from a single fulfilment centre.
Weighing the saving against the extra freight cost
None of this means you should fly everything. The saving has to exceed the extra freight cost. A simple way to test this for each product and lane:
- Calculate the annual extra freight cost of air: the difference in cost per unit between air and road, multiplied by annual volume on that lane.
- Calculate the annual inventory saving: the reduction in safety, cycle and pipeline stock, multiplied by your holding cost percentage.
- Add any one-off benefits, such as closing a warehouse or reducing markdowns.
- Compare the two. Where the saving is higher, air is justified.
The products where air pays off are usually high in value and light for their size: electronics, medical devices, cosmetics, fashion accessories and spare parts. Freight is a small share of their value, while the cost of holding them is high. Our guide to how domestic air freight rates are calculated will help you estimate the freight side accurately.
Practical ways to use air freight in your inventory strategy
Air as the replenishment default for A-class lines
Classify your range by sales value. Fly your top sellers so they turn quickly and need little buffer, and move slower lines by road.
Trigger-based expediting
Keep road as the default, but switch to air automatically when stock at a location falls below a set point. This protects service without flying everything.
Centralise slow movers
Hold slow-moving and high-value items in one central warehouse and fly them to customers on demand. You avoid spreading rarely sold stock across several sites.
Plan around peaks
Lean inventory relies on reliable freight. Before high-demand periods, agree capacity with your carrier and consider pre-positioning some stock. Our peak season planning guide covers how to do this.
Risks to manage
Lower inventory means less room for error. Build in these safeguards:
- Have a backup carrier or a road fallback for your most important lanes.
- Track on-time performance so you know your real lead time, not just the promised one.
- Review service factors and safety stock quarterly as demand and freight performance change.
- Watch freight cost volatility, including fuel surcharges, so the business case stays valid.
Used well, domestic air freight turns freight spend into an inventory saving. For the complete framework, including when to use air, how to manage costs and how to choose providers, read our guide to building a faster, leaner supply chain with domestic air freight.
Frequently asked questions
How much can domestic air freight reduce inventory?
It depends on your lead times, demand variability and product mix. Because safety stock rises with the square root of lead time, cutting lead time from five days to one can reduce safety stock by more than half. The total saving also includes pipeline stock and, in some cases, closing warehouses.
What holding cost percentage should I use?
Many businesses use 20 to 30 per cent of inventory value a year as a starting point. Include the cost of capital, storage, insurance, shrinkage and obsolescence. Products with short life cycles or expiry dates often have higher real holding costs.
Does air freight make sense for low-value products?
Usually not. When freight is a large share of product value and the goods are heavy or bulky, the extra freight cost normally outweighs any inventory saving. Air works best for goods that are high in value and light for their size.
Is just-in-time inventory risky in Australia?
It can be, because long distances and weather events can disrupt supply. The answer is not to avoid lean inventory but to support it with reliable carriers, backup options and extra buffer before known peak periods.
Sources and review. This article draws on guidance from the Civil Aviation Safety Authority (CASA), the Cyber and Infrastructure Security Centre within the Department of Home Affairs, IATA, airline cargo conditions of carriage and published carrier information. Rates, surcharges and rules change often, so confirm current requirements with your carrier before you ship.
Written and reviewed by
George Brown
Senior Air Freight Editor, Georgeiv.net
George has 18 years of air cargo experience, from ramp operations at Sydney Airport to managing airline allocations and pricing for forwarders across Australia and Asia-Pacific. He leads our domestic air freight coverage and checks every figure and rule before publication.