From the Port to the Bottom Line: How Port Logistics Bottlenecks Translate into Financial Impact

Article originally published on Valor Investe, written by Camila Affonso and her team of consultants at Leggio Group, in partnership with columnist Carlos Heitor Campani.

In this article, we examine how port bottlenecks can affect costs, working capital, cash generation, and return on invested capital. In supply chains dependent on port flows, small variations in time, capacity, and predictability can show up directly in financial performance. To understand this relationship, we'll separate two perspectives: that of the port, which provides infrastructure and services, and that of the user company, which relies on that infrastructure and depends on that flow to sustain its operations.

This distinction starts with the dynamics of the operations themselves. A port connects maritime access, berths, equipment, yards, gates, inland modes of transport, and support areas. For the port operator, these elements need to be combined to meet demand with productivity and profitability. For the user company, they are stages the cargo must pass through on its way to its destination. When one of these links becomes restrictive, the effect can ripple through the entire chain.

Restrictions can arise at various points. Channel limitations, tidal conditions, or berth availability can increase waiting time for docking. High berth occupancy, low productivity, or equipment unavailability can extend vessel service time. On land, yards operating near capacity, gate bottlenecks, road congestion, or rail constraints can slow the flow of cargo in and out. In these cases, the operational effect shows up as increased operating time or reduced effective capacity.

However, where the queue appears doesn't always correspond to where the constraint actually lies. Picture a terminal whose yard is operating near capacity. High occupancy can hinder internal movements, reduce productivity, and extend the vessel's time at berth. Other ships then begin waiting at anchor. The queue appears at sea, even though the constraint originated on land. A fix applied only to the visible point may fail to eliminate the bottleneck and simply shift it to another link in the chain.

For the port, this situation is primarily a matter of capacity utilization. Keeping cargo in the yard longer may, depending on the contract, generate storage revenue. At the same time, it occupies space, reduces flexibility, and can limit new cargo. The revenue gain needs to be weighed against the opportunity cost of the occupied capacity and against the effects on productivity, service level, and future revenue.

For the company using the port service, the read is different. Its interest isn't focused on utilization of the port asset, but rather on the time, cost, and predictability needed for its cargo to move through that infrastructure. A bottleneck can mean longer vessel dwell time, more days in storage, delayed cargo pickup, a longer logistics cycle, and the risk of a supply disruption. This is the perspective through which an operational problem translates into an economic outcome.

The first effect shows up in costs. A vessel that stays beyond the agreed loading or unloading period can trigger what's known as demurrage: an additional charge tied to the excess time the vessel is used. Likewise, cargo that sits in the terminal longer can increase storage expenses, while truck queues extend cycle time and can raise transport costs. The accounting treatment may vary depending on the nature of the business and the policies in place. The key point is identifying the incremental effect on margin, EBITDA, and operating income.

There is, however, a second dimension that doesn't fully show up on the income statement. The longer goods remain in the logistics flow, the greater the capital tied up in that cycle tends to be. This analysis needs to distinguish between inventory and goods in transit, operating working capital, capital employed, and cash. An increase in inventory can consume cash and raise capital employed without, at that same moment, representing an equivalent increase in expense on the income statement.

Lower predictability can also change inventory policy. It's important to distinguish an increase in average lead time from an increase in its variability. The former can expand the inventory needed to sustain the flow; the latter can raise the need for safety stock, depending on the service level, demand variability, and how critical the item is. Not every bottleneck, therefore, calls for the same inventory adjustment.

A simplified example helps illustrate this logic. Consider a company that moves R$1 million a day in goods subject to a given port flow. If a bottleneck adds three days to the cycle, roughly R$3 million in additional value may temporarily remain in transit or tied to that flow, assuming a relatively stable flow. That figure is an approximation of the economic resource associated with the cycle — it is not an additional R$3 million expense, nor does it automatically translate into a R$3 million increase in net working capital.

The actual financial impact will depend on factors such as payment terms, ownership of the goods in transit, existing inventory levels, and how the operation is financed. Even so, longer cycles tend to require more capital employed to sustain the same level of activity and can reduce the conversion of earnings into cash. The analysis should therefore separate the effect on the income statement from the effect on the balance sheet and cash flow.

The same event can produce different effects for each side. Longer cargo dwell time may increase the port's storage revenue but raise the user company's logistics costs. If that dwell time limits yard capacity, the port itself can also be affected, since it will handle less cargo and have less availability for new business. The goal shouldn't be to minimize a single indicator in isolation, but to optimize the system as a whole, taking into account total cost, capacity, and service level.

The solution needs to be evaluated the same way. For the port, reducing dwell time can increase yard turnover and throughput with the same infrastructure, but it may also reduce storage revenue or require changes to processes and outbound capacity. For the user company, the gain can mean lower cost, a shorter cycle time, less variability, and a reduced need for capital. The operational benefit is shared, but its financial translation differs for each party.

When the solution requires physical investment, the analysis needs to start from incremental cash flow and risk-adjusted return. For the port, new equipment, a yard expansion, or a new berth should be evaluated based on demand, utilization, incremental revenue, operating costs, CAPEX, useful life, and return on capital. For the user company, the improvement can be weighed against costs avoided, reduced inventory, lower exposure to disruptions, and greater predictability.

One practical way to translate an operational bottleneck into management terms is to build a bridge between operational and financial indicators. Simulation methods, for example, can be used to model the operation and identify potential constraints, measuring their impact on time, capacity, productivity, variability, and service level. From there, the effects on costs, revenue, or additional capital — including the impact on financial results — can be assessed.

The analysis, then, rests on two complementary questions. For the port, it's necessary to understand how the constraint affects capacity, productivity, revenue, capital, and return. For the port's users, it's necessary to assess how that same constraint affects total cost, inventory, service level, cash flow, and capital employed. In both cases, the diagnosis needs to account for the risk of simply shifting the bottleneck to another link in the chain. Separating these two lenses makes it possible to understand where the economic impact actually occurs and to support decisions that connect operations, the income statement, the balance sheet, cash, and return on capital.

*Carlos Heitor Campani holds a PhD in Finance and serves as Academic Director of iluminus – Academia de Finanças, Partner at CHC Treinamento e Consultoria, and Researcher at the Cátedra Brasilprev em Previdência and at ENS – Escola de Negócios e Seguros (School of Business and Insurance).

*Camila Affonso is a Partner at Leggio Group, Director of the Infrastructure Department at FIESP, holds a Master's in Corporate Finance from the Université de Bordeaux, a Specialization in Finance from COPPEAD/UFRJ, and degrees in Production Engineering and Mathematics from UFRJ.

Link to the article published on Valor Investe: https://valorinveste.globo.com/blogs/carlos-heitor-campani/coluna/do-porto-a-dre-do-gargalo-logistico-portuario-ao-impacto-financeiro.ghtml