The logistics costs are the costs caused by the flow of material goods within a company and between different companies, as well as during the maintenance of inventories.
They are defined in different ways by different companies. Some companies do not count interest or inventory depreciation as logistics costs. Others include your suppliers' distribution costs or purchasing costs.
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 the 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..
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The best-known function of logistics is transportation, representing 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.
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, earning 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..
The place where the inventory is kept, the warehouse, is also a component of the logistics cost.
Therefore, the storage cost 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..
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).
Consideration should be given to 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 should be implemented in the equipment as a way to achieve the reduction of logistics costs. Repairs or corrective maintenance don't work.
If equipment fails in the middle of a job, it can be costly in overtime, customer service, or accidents.
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 must switch to high-efficiency lighting in the warehouse..
Anything that reduces returns, be they 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 important strategic changes to reduce costs and also increase levels of customer service.
Automation and optimization of manual processes reduce personnel requirements, centralize production operations in lower-cost areas, and create more proactivity to ensure customer satisfaction..
A buyers association can be created to purchase the necessary logistics supplies at a lower cost thanks to the purchase of 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 in a creative way..
By meeting beyond customer expectations, the company can keep business up-to-date by spreading the burden of logistics costs across a larger number of orders..
Customer service should be considered in any measurement of changes in logistics costs.
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.
- Semi-finished product storage.
- Finished product storage.
- Production planning.
- Transfer of finished products to customers.
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 are related to the charges made by the various methods of transportation, such as train travel, trucks, 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.
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