A late shipment is never just late. Somewhere between the factory gate and the shelf, it has quietly been repriced, and nobody wrote the new price into the contract.
To see how that happens, I want to follow one buyer through a few decisions. The buyer and the two suppliers are made up. The research behind them is not. Each study is named where it appears and listed in full at the end, and whenever I move from what the studies found to what I make of it, I say so.
Two Offers on One Desk
A buyer who runs a growing business gets two quotes for the same goods. The first supplier is two percent cheaper. The second costs a little more but promises delivery on a fixed schedule.
The buyer reaches for a pen to circle the lower number. It is a sensible instinct, because two percent on a large order is real money. Then a colleague asks one question: how many days will the goods spend getting here?
The answer takes the shine off the cheap quote. The first supplier usually needs about three more days to clear goods and get them onto the ship. That means goods sitting longer before they reach the shelf, and a supply plan that rests on a schedule nobody has promised to keep.
So what is a day actually worth?
What a Day Costs
Two economists, David Hummels and Georg Schaur [1], went looking for an answer. Their data cover firms that can ship by air, which is fast and expensive, or by ocean, which is slow and cheap. By watching how often firms choose each, the authors worked out how much buyers value a single day. Their estimate is that a day in transit acts like a tariff of at least 0.6 percent of a good’s value. Economists call this an ad valorem tariff, which just means a tax set as a share of what the goods are worth.
They also found that parts and components are among the most time sensitive kinds of trade, and that the steep fall in air shipping prices seems tied to the spread of production across borders in stages.
Put the 0.6 percent on the buyer’s desk. Three days comes to about 1.8 percent. Treat that as a back of the envelope illustration, not a forecast. The study counts days in transit, and I am assuming a day spent clearing cargo costs about the same, which the study does not claim. A day is also worth more for some goods than for others. Even so, the first supplier’s two percent advantage shrinks to about a fifth of one percent. For goods where a day is worth more, the cheap quote may turn out to be the expensive one.
My reading is this. A tariff is announced, scheduled and argued over in public. A day of delay shows up quietly, differs from product to product, and is paid for by whoever holds the goods or waits for them. That is reason enough to give time a seat next to tariffs whenever partners compare offers.
Delay Works Like Distance
How far does the problem reach? Simeon Djankov, Caroline Freund and Cong Pham [2] looked at it from the exporter’s side. They collected figures, for 98 economies, on how many days a standard shipment takes to leave the factory and be loaded on a vessel, then ran a gravity model, which links trade between two partners to their size and the distance between them. For each extra day a product waits before it ships, trade falls by more than one percent. The authors offered another way to picture it: a day of delay is like a trading partner moving about 70 kilometres farther away, on average. Time sensitive goods, perishable farm products among them, take a harder hit.
That changes how I read a map. On paper the first supplier may sit near. If the cargo waits, in practice it sits far away. The second supplier may be closer than the map says, because cargo moves.
Perishables make the point plainly. Part of their value is gone before they arrive, so the same number of days means something different for them than for goods that keep.
Why the Buyer Pays for Reliability
Why would the buyer pay more for the second supplier? Carolyn Evans and James Harrigan [3] give a reason. In their model, retailers whose demand keeps shifting want to avoid carrying large inventories. Quick delivery lets them restock as demand moves, and only nearby suppliers can deliver that quickly. Their apparel import data fit the model: products where timeliness matters have increasingly come from nearby suppliers.
My reading is simpler. Our buyer has no spare warehouse, so the buyer is renting reliability. What the buyer wants has less to do with speed than with not being surprised. A supplier who delivers in ten days every time can be easier to plan around than one who delivers in six days most of the time.
One caution. These studies measure average delay. How much delay swings from one shipment to the next is a related question, and they do not settle it. Treat my point about predictability as a working proposition, not a finding.
Starting Small
The buyer is still cautious. Reliability is a promise, and promises are cheap. So the buyer places a small trial order first.
Researchers have a name for this habit. James Rauch and Joel Watson [4] study a firm that looks for a partner or supplier in a setting it does not know well, and the relationship that follows. Matched firms, they argue, can start small, using a trial order or pilot to learn whether the partner can handle a much larger one.
A trial order is also a test of time. The buyer finds out whether goods leave when promised, clear on the expected day and arrive when planned. Both sides can see those results, and neither can easily dispute them. The second supplier’s trial order arrives on the promised day.
The Part Made for One Customer
Months later, the buyer wants a part made to the buyer’s own design.
Nathan Nunn [5] studied what happens in cases like this. For each good, he measured the share of intermediate inputs that require investments tied to one relationship, and he matched it against trade flow figures and a gauge of judicial quality. His estimates show that economies with strong contract enforcement specialise in the goods where such investments matter most. Contract enforcement also accounts for a larger share of trade patterns than capital equipment and skilled workers do together.
I would carry that logic over to time. A supplier who tailors a part to one buyer is exposed, because the investment has no other use. The buyer is exposed too, because a late part can stop a production line. Contracts and courts help with the first risk. A record of on time delivery helps with the second, and it builds in plain view, shipment after shipment.
How the Story Ends
The buyer signs with the second supplier. The first shipment arrives on the promised day. So does the second. By the fifth, the buyer has stopped checking the calendar. By the tenth, the order has grown and the custom part is on the table.
The first supplier’s price is still two percent lower. It no longer matters. The second supplier earned what the price list could not show, which is trust, built one on time delivery at a time.
The ending is invented. The pattern behind it is what the research describes: partners learn to trust each other through small steps they can verify.
What the Research Cannot Tell Us
Estimates differ across studies, products and methods. Trade data of this kind rarely rule out every competing explanation. And these five studies date from 2003 to 2013, so test the magnitudes against current conditions in your own sector before leaning on them.
Three Lessons for Commercial Diplomacy
These are my proposals, offered for scrutiny.
First, measure time as carefully as price. Time to release, time to clear and time from door to door are harder to find than a price, yet as the illustration above shows, they can outweigh a small price difference. Ask for time data when you compare partners, and ask for it by product line.
Second, put time in writing. A stated delivery commitment can be reviewed, improved and held to account. One that is only assumed can become a dispute at the first delay. A written commitment also gives a trial order its meaning, because a pilot teaches something only if both sides agreed beforehand what a good result looks like.
Third, share changes early. Many delays begin as changes in documents or procedures that one side hears about late. Early notice gives the other side time to adjust, and it protects the one input neither side can store.
Why Time Wins Lasting Partnerships
Price usually opens a negotiation. It is visible, comparable and easy to defend. Time builds up unseen, falls unevenly, and helps decide whether a buyer trusts a supplier enough to place a second order. We tend to describe partnerships by what two sides promise. They are better judged by what each side delivers on schedule, again and again. That record builds slowly, it is noticed quickly when it fails, and no negotiating session can create it on its own.
Price may open a negotiation, but time helps decide who is still at the table when the second order arrives.
Sources
- David Hummels and Georg Schaur, “Time as a Trade Barrier,” American Economic Review 103, no. 7 (December 2013): 2935 to 2959. https://doi.org/10.1257/aer.103.7.2935
- Simeon Djankov, Caroline Freund and Cong S. Pham, “Trading on Time,” Review of Economics and Statistics 92, no. 1 (2010): 166 to 173. https://doi.org/10.1162/rest.2009.11498
- Carolyn L. Evans and James Harrigan, “Distance, Time, and Specialization: Lean Retailing in General Equilibrium,” American Economic Review 95, no. 1 (March 2005): 292 to 313. https://doi.org/10.1257/0002828053828590
- James E. Rauch and Joel Watson, “Starting Small in an Unfamiliar Environment,” International Journal of Industrial Organization 21, no. 7 (September 2003): 1021 to 1042. Link is to the earlier Cowles Foundation Discussion Paper 1218. https://ideas.repec.org/p/cwl/cwldpp/1218.html
- Nathan Nunn, “Relationship Specificity, Incomplete Contracts, and the Pattern of Trade,” Quarterly Journal of Economics 122, no. 2 (May 2007): 569 to 600. https://doi.org/10.1162/qjec.122.2.569
