Different types of logistics costs and how to reduce them?
Seeing your logistics cost rise from time to time? Don’t worry — most businesses face issues with controlling and managing logistics costs. Even after realizing the negative effect of the increasing logistics cost on the business bottom line, companies aren’t able to take effective actions toward reducing logistics costs.
But we also know that this is not because business owners don’t care; it’s because logistics cost management is not that easy.
So here we’ve got everything you need, i.e. “What is logistics cost”, and “How to optimize logistics costs”.
The process of organizing, managing, and transporting goods from the place of manufacturing to the place of sales is called shipping logistics. So, logistics cost is the term of the overall expenses related to this process.
This means that your logistics cost encompasses everything from purchasing raw materials to the payments made for the distribution of the products. Since it includes costs of various elements, logistics costs can be very high.
However, reducing logistics costs requires a detailed understanding of the types and every aspect that contributes to the total cost.
One of the largest logistics costs for a business is transportation expenses. You can either build an in-house team to manage transportation or rely on a third-party logistics service provider. Both of these will cost you a handsome amount because transportation costs include:
● Getting raw materials from the source to the manufacturing unit
● Transporting the finished goods from the manufacturing unit to the warehouse
● Ultimately, delivering the goods from the warehouse to different suppliers or direct to the end-consumer.
The cost of transporting raw materials to the manufacturing unit and from there to the warehouse can still be minimized as these are transported in bulk. However, the delivery from the warehouse to direct customers can be hefty because these are not always bulk deliveries. Last-mile charges can be expensive.
Next comes the cost of inventory and warehousing. Obviously, you need a place to pack and store your products from where those will be delivered to the customers. Inventory storage is needed if you have a third-party manufacturer or you manufacture raw materials into finished goods in-house.
This is another pretty expensive cost, as warehousing prices are increasing every now and then. Plus, the larger the inventory, the bigger the warehouse requirement.
Moreover, as e-commerce businesses are growing, there can be a shortage of warehousing facilities and hence an increase in price again. Whether you buy a warehouse or rent it, both are going to be expensive.
Warehouse rent is not the only cost under this category; insurance, security, utility, and technology charges are also to be considered.
Another logistics cost is packing and handling expenses. You will have to pay for the labor, material, and technology used to handle and pack your finished goods. The business will also have to bear waste disposal expenses, costs in case of infestation or damage, or any other packing associate costs.
For example, you will have to pay the people packing your products; you will have to pay for the material like plastic and industrial wrapping paper and machines used for sealing and organizing the products in the warehouse.
Along with all the other costs, there are administrative and overhead expenses. This includes salaries and wages of all the labor involved in the process, the cost of software and tech used taxes and regulatory fees, and other extra costs.
These costs are not directly related to the production or distribution of the products. However, any expense related to the process, i.e., indirect expense, is counted under administrative or overhead.
This is the most expensive of all logistics costs. Last-mile delivery is described are delivering the goods directly to the customer. Last-mile delivery makes up almost half the shipping cost because the delivery agents have to make multiple stops in various places.
Along with this, they have to go through many security gates and deal with different reception processes for the delivery of the package.
Step one to asses your logistics cost is to set a calculation timeframe or cycle. Meaning deciding how regularly you want to measure and analyze the logistics cost. A monthly assessment is a good option, as you can always be sure that costs are overriding your budget.
Along with the measurement frequency, list all the metrics you wish to use for the calculator and evaluation. Once you have all this in place, you can assess your logistics cost by dividing the calculation into the above-mentioned types:
● Administrative and overhead
● Last mile delivery
Make lists of all the expenses under each category, align all the exact amounts with it, and add up all the costs to get your total.
Warehouse Rent: $1500
Utilities and security: $1000
2. Last mile delivery
Maintenance staff: $2500
Plastic wraps: $1000
Cardboard boxes: $1200
Grand Total: $2500 + $4500 + $2200 = $9200
This is just one part of the calculation. You must also consider the transportation and administrative costs to get a full total. However, this just illustrates how you can calculate your monthly logistics cost.
Technique one for reducing logistics costs is to optimize your inventory management. Basically, the lesser the inventory, the smaller the warehouse space required, and the cheaper the warehouse costs.
However, reducing inventory count cannot be done instantly because then it can lead to stock shortage and delivery delays to the customer.
Hence, plan your inventory mindfully. Calculate your regular sales, keep a note of the average requirement of the products, and evaluate the delivery and manufacturing time put all this with the average inventory standards needed for daily orders.
Transportation is an essential part of the logistics cost. Hence, technique two for logistics cost management is streamlining transportation. Always ensure you consolidate your shipments and avoid short trips or sending out half-occupied trucks.
Along with this, research and choose the best route for transportation that costs less and also isn’t very difficult for the drivers. Next, go for the most cost-effective transportation method.
For example, if your warehouse is closer to the dock from the manufacturing unit, opt for water shipping your goods in one full consignment.
Automating logistics and warehouse processes is the easiest technique for reducing logistics costs. Not only will automation help to speed up the delivery process, but it will also make the whole workflow smooth.
This is because automation reduces the requirement of human intervention, and that ultimately saves you money on payroll and extra time spent on correcting human errors. Some automation system examples are automated storage and retrieval systems, modular shelving, expense management, warehouse robotics, etc.
Logistics cost management also involves keeping customers happy with your service. Invest in systems that will help you immediately respond to your customer's queries and exceed their expectations. There is a beneficial proportional relationship between client satisfaction and reducing logistics costs.
For example, if you have high shipping costs, your customers might not proceed further with their purchase. In order to combat this, you can waive the shipping costs over a certain amount of purchase. Then to cover the overall cost, you can increase the total purchase amount. This will help you keep the customers happy and cover your losses as well.
Another one of the logistics cost-saving initiatives is selecting the right carrier service and negotiating for the best deals. According to your product quality and fulfillment requirements, you need to select the best carrier method.
If the best way to transport your products is through the road, you can research different companies offering the service and always go for consolidating your supplies into lesser shipping trips.
Once you are comfortable with your transport service provider, you can negotiate deals for a lesser price with the new relationship between you and the vendor.
As mentioned above, last-mile delivery is the most expensive component among all the logistics costs. So, optimizing this cost becomes a must. In order to do so, start by finding the best cost-effective and fuel-efficient routes for deliveries and use software that can help you track the vehicle when out for delivery.
Optimize the delivery by checking beforehand for any construction delays, roadblocks, traffic possibilities, etc. Plan the route according to these obstacles. This will help you save fuel and time.
Automation tools are here to stay. We cannot stress enough how useful corporate cards can be to help optimize your payment management. Corporate cards streamline logistics payments by providing you with a faster, safer, and more cost-effective way to transfer money.
Along with this, integrating corporate cards with an expense management system can make all the difference. You get real-time expense updates, automatically created expense reports and analytics, accounting integration for all payments made through the card, effective spend limit restrictions, and much more.
Managing logistics costs requires the use of the latest technology to stay updated with all payments and the details related to those. This is where corporate cards come to play.
Here is how corporate card can help in logistics cost management and, to some extent, reduce logistics costs.
You can give corporate cards to the employees who are integral cogs of the process and are responsible for making all the payments. These cards help in making easy and timely payments to all. Warehouse rent, security charges, delivery agent fees, manufacturing costs, etc., everything can be controlled and tacked through corporate cards.
Corporate cards are such tools that provide seamless control over expenses and record important details. When your employees will make payments using these can, you can get real-time updates on those expenses.
You can also set spending limits on each card to avoid overspending. For example, you assign a card for warehouse expenses. You can set a spending limit on the total amount of warehouse expenses you pay ($2500 ceiling limit).
Without corporate cards in the picture; employees have to spend a lot of time and effort getting approvals and permissions from the finance team and managers.
However, when the employees are given corporate cards, they are already given permission to make spends to a certain amount and of a certain type.
So not only do you save your employees' time but also the money spent on the hours of approvals and reconciliation.
One of the best advantages of using corporate cards is security. Cash and cheques are highly prone to be lost or misused. However, physical corporate cards help employees make vendor payments in person.
On the other hand, with virtual corporate cards, employees are not required to go anywhere. Enter the required details in the system, and the payment is done. These cards have security features like two-factor authentication and 3DS protocol that keep your money safe.
Along with reducing logistics costs, corporate cards also help to shift the administrative burden from the grunt work of getting approvals and coordination to just looking over the budget and expense details.
So basically, the corporate cards and expenses management system take over the heavy manual tasks, and the more human-centric tasks like planning and policy implementation are given more attention.
Logistics cost management can be simplified by just doing one simple thing - implementing the use of corporate cards.
As explained above, Corporate cards are effective tools for logistics cost management. As one of the most influential logistics cost-saving initiatives, these cards are flexible to be integrated with an expense management system. Along with this, international payments can be made without a hassle.
We have already said enough about corporate card benefits for logistics cost management; let's talk about the best corporate card provider that can help you boost the system even further. Volopay!
Volopay is an expense management software and a leading corporate card provider. The automated expense management system and the corporate card together make an unbeatable combination for reducing logistics costs.
Both physical and virtual corporate card allow customers to make the best out of any situation. Here are some key components of Volopay cards that will definitely make you want them:
● Feature to set customized spending limit restrictions on all cards
● Get one physical card each and unlimited virtual cards for employees
● Make easy international and domestic payments
● Get real-time analytics, expense tracking, and recording
● Reap the benefits of direct accounting integration and much more