In this era, efficient logistics is the backbone of any thriving business. However, managing logistics costs effectively remains a pressing question for companies worldwide.
If seen from the Statista lens, logistics expenditures account for around 11% of global GDP, with transportation costs reaching more than 60% of total logistics costs. Therefore, businesses must discover innovative methods to reduce these expenses without settling for the quality of their logistics service.
What are Logistics Costs?
The term “logistics costs” refers to all expenses involved in transportation, storage, and goods delivery. These costs occur throughout the supply chain, from raw material acquisition to the delivery of final products to end consumers. The core elements of logistics costs comprise transportation, warehousing, packaging, and administrative expenditures.
Furthermore, logistics costs influence pricing, competitiveness, and profitability. For example, high logistics expenses can wear away profit margins, pressuring businesses to pass the load onto customers. This makes cost management significant for sustainability.
Types of Logistics Costs & How to Calculate Them?
If a business is handling such costs, it becomes quite crucial to understand the logistics costs while also knowing how to calculate them. Here’s an easy breakdown with an example of each:
Transportation Costs
Transportation costs are faced when shifting products via road, rail, air, or sea. It is influenced by factors such as the mode of transport, type of goods, volumetric weight, and distance covered. LTL (Less Than Truckload) delivery is often more cost-effective compared to FLT (Full Truckload) services. Charges are typically calculated on a per-kilometre basis, and pricing can vary depending on the nature of the parcel being shipped.
- Calculation: Total freight cost + fuel charges + tolls + transport maintenance.
- Example: If your business ships products worth Rs. 10 lakhs and pays Rs. 1 lakh in freight charges, transportation costs are 10% of the total product value.
Warehousing Costs
Warehousing costs are associated with storing the goods. Warehouse costs are primarily defined by the space your goods require, typically calculated as Rs per square meter or Rs per pallet. These costs can differ depending on additional value-added services you opt for, such as customized packing, kitting, or using a special warehouse storage area. The type and size of your product also play a significant role in determining storage pricing.
- Calculation: Rent + utilities + labor expenses.
- Example: A company needs to store 500 pallets of goods in a warehouse for one month. They also require value-added services like custom packing and temperature-controlled storage.
Cost Breakdown:
- Storage Cost per Pallet: Rs 150/month
- Total for 500 pallets = 500 x 150 = Rs 75,000
- Temperature-Controlled Storage: Additional Rs 50/pallet/month
- Total = 500 x 50 = Rs 25,000
- Custom Packing Service: Rs 10,000 flat fee
Total Warehouse Cost:
- Storage Cost: Rs 75,000
- Temperature-Controlled Storage: Rs 25,000
- Custom Packing: Rs 10,000
- Grand Total: Rs 1,10,000 for one month
Inventory Carrying Costs
Inventory carrying costs refer to the expenses of holding and storing goods until they are sold or shipped. These costs include warehouse storage prices, insurance, depreciation, and even opportunity costs of the capital tied up in the inventory. The costs can also vary depending on the type of products, their storage requirements, and how long they remain in stock.
- Calculation: (Storage cost + depreciation + insurance) / goods value.
- Example: If your business is holding Rs. 50 lakhs worth of goods with Rs. 5 lakhs yearly costs, which means your carrying cost is 10%.
Administrative Costs
Administrative costs imply the overheads for handling logistics activities.
- Calculation: Salaries + software + communication costs.
Logistics Costs Breakdown
| Cost Type | Percentage of Total Logistics Costs |
| Transportation Costs | 60-65% |
| Warehousing Costs | 15-20% |
| Inventory Carrying Costs | 10-15% |
| Packaging Costs | 5-10% |
| Administrative Costs | 3-5% |
Top 6 Methods to Reduce Logistics Costs
No matter what, every business and its owner want to minimize costs as much as possible. Hence, here is how you can reduce logistics costs for your business by implementing these innovative strategies:
- Optimize Transportation Routes
- Consider utilizing route optimization software.
- You can also minimize unnecessary mileage or save fuel costs.
- Consolidate Shipments
- Blend shipments of smaller quantities into larger loads to minimize per-unit shipping costs.
- You can also associate with third-party logistics providers as they help you avail yourself of bulk discounts.
- Invest in Technology
- Bring warehouse management systems (WMS) into action to streamline your operations.
- Consider using predictive analytics as well to forecast demand and prevent overstocking.
- Negotiate with Carriers
- Do the market study and compare multiple transport companies to find the best rates.
- You can also select long-term contracts for constant rates.
- Embrace Just-in-Time (JIT) Inventory
- Minimize the storage costs by aligning goods with demand.
- For instance, Toyota saved millions of dollars every single year just by implementing the JIT in their system.
- Technology and Automation Utilizing
- Consider utilizing automated sorting mechanisms in modern warehouses.
- Position robotic pickers to power up the order fulfillment.
Why Businesses Must Focus on Managing Logistics Costs?
Everything is fine; there might be a few minds reading this. Why are logistics costs even necessary for businesses when shifting their focus? Well, it is quite crucial. Here’s why and what you ensure after focusing on managing logistics costs:
- Higher Profit Margins: You save on costs quite a bit, which ultimately leads to increased profitability.
- Competitive Pricing: Effective logistics also enable competitive product rates.
- Improved Customer Satisfaction: It also reduces costs, which leads to faster and more affordable deliveries.
Factors That Cause Fluctuations in Logistics Costs
The following are the top factors that are considered the leading influencers when it comes to logistics service costs for a business:
Fuel Prices: Global oil rate fluctuations impact transportation costs in a direct way. For instance, last year—in 2023—an increase in fuel prices uplifted freight charges by almost 15%.
Employee Costs: The higher wages for drivers, warehouse staff, and logistics managers increase expenditures.
Demand-Supply Imbalances: Peak seasons, such as holidays, give rise to maximized freight rates thanks to high demand.
Regulatory Changes: Rigorous emission norms or tariffs can increase compliance costs.
Economic Factors: The increase in currency depreciation or inflation uplifts overall operational expenditures.
Endnote
To conclude, logistics costs are a substantial part of any business’s financial strategy. Businesses must mitigate these costs by utilizing technology, strategic associations, and process optimization.
With transportation taking the lion’s share, maximizing efficiencies in this segment can lead to massive savings. On a planet where every penny counts, effective logistics cost management is not just a matter of necessity but also a competitive advantage.
AAJ Supply Chain Management
