LOGISTICS COSTS: WHAT THEY ARE, WHAT THEY ARE AND EXAMPLES - DUDAS - 2025

The logistics costs are the costs caused by the flow of material goods within a company and between different companies as well as during maintenance inventory.

They are defined in different ways by different companies. Some companies don't count interest or inventory depreciation as logistics costs. Others include your suppliers' distribution costs or purchasing costs.

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In some cases, up to the purchase value of the goods purchased is included in logistics costs. Therefore, there is no generic definition of this term, but each company needs to define logistics costs for itself and for the indicators that will be followed to reduce costs.

In general, companies have to balance cost and performance when managing logistics costs. This is because the lowest cost transportation may not be the fastest, and therefore higher costs are required in order to provide better performance and on-time delivery.

Main logistics costs

Transport

The best-known function of logistics is transportation, accounting for the highest percentage of logistics costs for most companies.

Transportation costs are made up of fixed and variable costs: fixed costs include depreciation of the fleet, wages, maintenance. On the other hand, the variable part includes fuel, tires, lubricants, among others. If transportation is outsourced, the full cost is paid in the form of freight or shipping cost.

Inventory

Another important factor in the composition of logistics costs is inventory. Fast and frequent shipping can keep inventory levels low, but you will pay a lot for shipping.

On the other hand, if batches are large, high-volume, and infrequent, then average inventory and warehousing costs will be high, with low shipping costs. The cost of inventory is made up of several elements:

- The value of the inventory itself that could be invested elsewhere, generating interest.

- Maintaining inventory also costs money: insurance, obsolescence, losses and other associated risks.

- During the transport operation, the inventory inside the trucks is not available. Therefore, the transit inventory also adds to this cost.

- Finally, if inventories are not well managed, the company will have a shortage of products, and this cost is difficult to measure.

Storage

The place where the inventory is kept, the warehouse, is also a component of the logistics cost.

Thus, the cost of storage includes taxes, lighting, maintenance (or rent if the warehouse is rented), handling and storage equipment, as well as salaries (and positions) of the employees necessary to handle the products.

Orders

The order cost is somewhat lower, but it is also important to consider. They are the costs related to the material used (paper, office supplies, computers), personnel costs (salaries and positions) and indirect costs (electricity, telephone, communication, among others).

Reduction

Labor costs

Consider reducing labor for any warehousing operation. For this, there are software systems that could help manage work in the warehouse.

Projects should also be executed that automate repetitive tasks, such as voice-directed picking, carousel storage, robotics, etc.

Preventive Maintenance

Preventive maintenance should be implemented in equipment as a way to achieve logistics cost reduction. Repairs or corrective maintenance do not work.

If equipment fails in the middle of a job, it can be costly in overtime, customer service, or accidents.

Use of systems and technology

A warehouse management system helps reduce costs by automating cycle counting and maintaining control of locations.

Warehouse design saves money. For example, having the highest demand items close to the dispatch will reduce the cost of collection and storage. On the other hand, to save money you should switch to high-efficiency lighting in the warehouse.

Anything that reduces returns, whether it is customer or supplier returns, will help reduce logistics costs.

A materials review meeting will reduce the need for additional spaces by reviewing obsolete, slow moving and stationary inventories monthly, sending recommendations to management on their disposition.

With an automated transportation system, the company can implement major strategic changes to reduce costs and also increase levels of customer service.

Automation and optimization of manual processes reduce staffing requirements, centralize production operations in lower-cost areas, and create more proactivity to ensure customer satisfaction.

Providers

A buyers association can be created to purchase the necessary logistics supplies at a lower cost by purchasing larger quantities.

Suppliers can be invited to meetings with a structured agenda, one of the topics being to analyze their products and generate ideas for reducing logistics costs. Thus, the supplier can help by working with the company creatively.

Focus on the customer

By meeting beyond customer expectations, the company can keep business current by spreading the burden of logistics costs across a larger number of orders.

Customer service must be considered in any measurement of changes in logistics costs.

Examples

The different examples of logistics costs emerge through the following production stages:

- Acquisition of raw materials, intermediate products and other products from suppliers.

- Storage of materials and waste.

- External and internal transport.

- Storage of semi-finished products.

- Storage of finished products.

- Production planning.

- Transfer of finished products to clients.

According to the variability criterion, you can have fixed and variable logistics costs. Fixed costs include depreciation costs for storage, transportation, as well as taxes or exit fees.

Variable costs are labor costs, capital costs involved, and also the consumption of materials and fuels.

Logistics costs relate to charges made for various methods of transportation, such as train travel, trucking, air travel, and ocean transportation.

Additionally, logistics costs include fuel, storage space, packaging, security, material handling, fees, and duties. In general, logistics costs include the following:

- Transportation expenses.

- Inventory costs.

- Labor costs.

- Customer service expenses.

- Rent for storage expenses.

- Administration costs.

References

1. Mba Skool (2019). Logistics Costs. Taken from: mbaskool.com.
2. Cynthia Gaffney (2019). Definition of Logistics Costs. Small Business-Chron. Taken from: smallbusiness.chron.com.
3. The Geography of Transport Systems (2019). Composition of Logistic Costs. Taken from: transportgeography.org.
4. CEOpedia (2019). Types of logistics costs. Taken from: ceopedia.org.
5. Cerasis (2019). Logistics Cost Reduction: 6 Focuses to Create More Profit. Taken from: cerasis.com.
6. Easy Logistics (2017). Logistics costs - what costs compose it? Taken from: easylogistics.site.