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Cost of logistics & Cost on Logistics

Presented By :Priyanka SahaPriyabrata SharmaRajib Sarkar

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Logistics Cost :

The performance of a supply chain can be illustrated with the help of total

logistics cost which requires the establishment of a cost revenue analysis

framework.

To define the logistics cost, one must define the desired outputs from the

logistics system and then seek to identify the costs associated with

providing those outputs. The manager must understand how the behaviour of one cost differs from

the behaviour of another cost and for running a logistics system requires

the manager to understand and use a variety of cost information.

The cost of logistics varies from industry to industry

Cost can be divided in many ways: Fixed, variable and semi-variable, Cash

and non cash, direct and indirect, tangible and intangible. Each of these

costs may reveal important information for making logistics decisions.

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IMPORTANT ELEMENTS OF LOGISTICS COST

ARE:

Equipment cost at source

Warehousing cost

Pipeline inventory

Product inventory at warehouses and dealers

Transit losses/ insurance

Storage losses/ insurance

Handling and warehouses operations Packaging

Transportation

Customer service

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Cost of logistics

Cost of logistics performing various activities

including cost of planning and the managing a range

of logistics activities such as Transportation,

Distribution of finish goods from warehouse,

receiving,Inspecting,& Storing of goods etc. It is a

nonrecurring expenditure and also maintained and

reliability must be there.

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Cost on logistics

For the maintenance and repair of capital

equipment, purchase an depreciation cost of

equipment thus installed. Like Maintenance of

capital machinery, Maintenance of warehouse,warehouse rent, wages of labors,

depreciation cost of capital

machinery etc.

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Total logistics Cost Total cost = transportation cost + facilities

cost + communication cost + inventory cost +

protective packaging cost + distribution cost.

Cost flow Diagram:

N.A.C.

F.C.

B.C.

N.A.C.

POINT OF ORIGIN POINT OF DESTINATION

I.N.C. = INPUT NODAL COST

N.A.C. = NODAL ACTIVITY COST

F.C. = FLOW COST

B.C. = BARRIER COST

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Cost Relationship

Total Logistics Cost

Primary Transport Cost

Inventory Holding Cost

Storage Cost

Systems Cost Local

Delivery Cost

Number of DCs/Depots

Inventory

Number of Fleet

Number of DCs nearer to the market and

customer

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HOW TO GENERATE REVENUE?

Basically in a logistics firm (enterprise), revenue

is generated through three key elements.

They are-

Manufacturer

Warehousing decision

Customer

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Manufacturer

A manufacturer considers performing the warehousing function internally.

The product is transported by truck 2 miles to a public warehouse and

then the product is unloaded and placed in storage. The manufacturers

sales representatives contact the public warehouse when the orders are

received which are thereby forwarded electronically to the warehouse.

The manufacturer has been looking for ways to reduce costs. At the

production facility, jobs have been eliminated or combined. In this way

some employees and mangers are laid off and others are afraid their jobs

will be cut next, so morale is low. Regarding this problem, the

manufacturer considers performing warehousing function in-house

instead of a public warehouse which will reduce the costs and thereforegenerate revenue for the firm.

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Warehousing Decision

Another element which helps in generating revenue is the warehousingdecision. A manufacturer must decide whether to have a private or apublic warehouse. In order to reduce costs alone, it is obvious to build aprivate warehouse. The initial benefit of having a private warehouse is thedirect cost savings in per unit warehouse charges. It also deals with thereduced labor force. The employees that were laid off could perform thefunctions with extensive training which would help employee morale. The

sales personnel could have their offices in the private warehouse whichwould eliminate the necessary outside contact with the public warehousepersonnel. Management could have a greater control on the operationsincluding inventory management. The distance and route to the site aresimilar to the public warehouse. But there are certain drawbacks ofprivate warehouse such as loss of specialization and expertise which are

absent in case of public warehouse.

So it is a very crucial decision for the manufacturer whether to build aprivate or a public warehouse which will directly affect the revenuegeneration.

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Customers

In order to be effective, a logistics system must achieve a level of eachattribute of customer service performance. This is possible only whenthere exists 3 key factors-

Availability- providing a product or material on predictable basis.

Performance- ability to achieve a predetermined speed, consistency andflexibility in delivery.

Reliability- overall quality of service performance.

Customer demand will increase if service meets or exceeds expectations.

The determination of how much basic customer service to offer must be

justified in terms of relative cost and benefit. It can be done by quantifying

the cost of providing a specific level of overall service and then estimating

the expected benefits in terms of revenue and long term customer loyalty.

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10 Tips for Reducing Logistics Costs:

1. Understand the true costs of sourcing overseas -Calculate freight, duty, brokerage, and

inventory-carrying costs to support these lengthened supply chains

2. Focus on eliminating the variability from transit times -more variable the transit times,more likely is that receiving party is using more premium freight, building buffers of inventory

or ordering more often and more quantity than necessary to compensate for the uncertainty

3. Tariff engineering -Strategically source and manufacture products to take advantage of

classification duty rates and eligibility for special trade programs

4. Consolidate -If you have multiple suppliers in one country, consolidate their goods into one

shipment

5. Informed decision-making.

6. Sometimes insurance doesnt pay -if company having a shipment of premium goods, they

often tend to use the carriers insurance, which is very expensive

7. Automate compliance processes -Companies implementing software solutions to automate

trade compliance are able to speed the cycle times associated with tasks being performed

manually, such as document preparation, and eliminate the associated errors

8. Control your express/expedited shipping costs.

9. Planes, trains and automobiles.

10. Be aware of non-tariff trade barriers.

-by Bernie Hart, Executive Director, Logistics Management, J.P. Morgan

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EXAMPLE Analysis of revenue and cost for a specific customer

Gross sales value 100,000

Less discount 10,000

Net sales value 90,000Less direct cost of goods sold 20,000

Gross contribution 70,000

Less sales and marketing costs:

Sales calls 3,000

Co-operative promotions 1,000

Merchandising 3,000

7,000

63,000

Less distribution costs:

Order processing 500

Storage and handling 600

Inventory financing 700

Transport 2,000

Packaging 300

Refusals 500

4,600

Customer gross contribution 58,400

Less other customer-related costs:

Credit financing 1,500

Returns 500

2,000

Customer net contribution 56,400

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CONTDIn this case a gross contribution of 70,000 becomes a net contribution

of 56,400 as soon as the costs unique to this customer are taken into

account. If the analysis were to be extended by attempting to allocate

overheads what might at first seem to be a profitable customer could

be deemed to be the reverse. However, as long as the net contribution is

positive and there is no opportunity cost in servicing

that customer the company would be better off with the businessthan without it.

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SUMMARY

Since logistics costs can account for such a large proportion of total

costs in the business it is critical that they should be carefully managed.

However, it is not always the case that the true costs of logistics are fully

understood. Traditional approaches to accounting based upon full-cost

allocation can be misleading and dangerous. Activity-based costingmethods provide some significant advantages in identifying the real costs

of serving different types of customers or different channels of distribution.

Logistics management impacts not only upon the profit and loss account of

the business, but also upon the balance sheet. Logistics is also increasingly

being recognized as having a significant impact upon economic value added

and hence shareholder value. It is critical that decisions on logistics

strategies made based upon a thorough understanding of the impact they

will have on the financial performance of the business.

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