Logistics Costs: How To Measure, Optimize, And Reduce Them

This article discusses and breaks down logistics costs to help supply chain managers understand, optimize, and reduce them.

calculating logistics costs

Anyone working in logistics doesn’t need to be told that it’s complex and demanding. But there’s a difference between realizing your workplace is challenging and being accountable for managing the costs associated with it—which is a significantly greater challenge. 

Logistics expenses encompass every step of getting goods to market—from warehousing to the final delivery. And these expenses account for a significant slice of your business's budget. Wisely managing them can literally be the difference between profit and loss. 

In this article, we look at what these costs entail, explore the types and nuances of these expenditures, and give you insights on measuring and reducing them. Through optimization, your company can achieve better control over budget-related operations and boost your competitive value and reputation in the market. 

What are logistics costs?

Logistics costs represent a collection of expenses that are incurred to move goods from their point of origin to the end consumer. 

These costs are dynamic and entangled, often comprising transportation, warehousing, inventory carrying, order processing, and administrative costs associated with the operations of supply chains.

To get an idea of how extensive these costs are, we’ve put together a comprehensive and categorized list of logistics costs below. You can use this list to meticulously go through your operations. And in the next section, we’ll break down five of the typical costs in more detail.

Transportation costs

  • Freight charges
  • Fuel costs
  • Shipping and handling fees
  • Carrier fees (air, sea, rail, road)
  • Insurance costs for transit
  • Coordination fees
  • Duties and taxes
  • Costs related to delays or expedited shipments

Warehousing costs

  • Storage fees (rent or mortgage for warehouse space)
  • Utility expenses (electricity, water, HVAC)
  • Equipment costs (forklifts, racking systems)
  • Security expenses
  • Inventory loss or damage

Inventory carrying costs

  • Cost of capital (money tied up in inventory)
  • Insurance on inventory
  • Taxes on inventory
  • Depreciation of goods
  • Obsolescence, shrinkage, and spoilage costs
calculator counting

Order processing and information costs

  • Labor costs for order entry, picking, packing, and shipping
  • Technology systems for order and inventory management
  • Data collection and analysis
  • Communication expenses

Packaging costs

  • Packaging materials
  • Container costs
  • Pallet costs
  • Labeling and documentation

Administrative costs

  • Staff salaries and benefits
  • Office supplies and equipment
  • Logistics management software subscriptions
  • Compliance and regulatory costs

Customer service costs

  • Customer support team expenses
  • Returns processing
  • Warranty and replacement costs

Reverse logistics costs

  • Cost of returns transportation
  • Restocking and refurbishing expenses
  • Recycling or disposal costs

Third-party logistics (3PL) provider costs

  • Outsourced service fees
  • Contractual expenses
  • Integration costs with 3PL technologies
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Quality control costs

  • Inspection
  • Testing
  • Compliance checks

Procurement costs

  • Supplier management
  • Purchasing activities
  • Contract negotiation and administration

Miscellaneous costs

  • Losses due to theft or pilferage
  • Risk management and contingency planning
  • Investments in sustainability and eco-friendly processes

Knowing where every coin goes can illuminate potential inefficiencies and reveal opportunities for cost-saving strategies—a crucial insight as logistics expenses can quickly spiral out of control, eroding any profit margins.

Comprehensively grasping the breadth of logistics costs is a strategic point that should dictate your business's long-term success and sustainability.

How to break down types of logistics costs

In dissecting logistics costs, businesses must differentiate between direct and indirect expenses. 

Direct costs are overt and quantifiable, often billed per service, like fuel surcharges for transportation or payment for labor in warehousing. 

Indirect costs are less visible, such as the depreciation of goods or administrative overhead, but they can significantly impact the bottom line.

Let’s look more closely at the typical top five areas that supply chain managers go to as they begin optimizing their operations.

Transportation expenses, often the most substantial aspect of logistics costs, include costs related to shipping via air, rail, road, or sea. Transportation is often the most considerable direct cost within logistics. This includes fuel, maintenance, freight rates, and driver compensation. 

For example, efficient route planning can optimize these costs, whereas an ad hoc or poorly planned route can escalate expenses unnecessarily. Additionally, depending on your model, these costs would include coordinators, brokers, etc. 

Warehousing costs, typically a direct expense, concern the physical space to store inventory and the logistics of managing that space. These costs involve warehouse management systems that keep track of inventory levels, the labor required for picking and packing orders, and the utilities necessary to maintain an optimal environment, such as climate control to preserve product integrity. 

women working in the warehouse

A real-life scenario might involve a retailer paying for additional climate-controlled space to accommodate a seasonal surplus of perishable goods, which increases handling charges due to the high turnover of products.

Inventory carrying costs reflect the broader economic implications of stock management—where the direct costs include the purchase price of the goods. In contrast, indirect costs may be losing value over time or insurance. 

Beyond the capital invested in inventory, these costs account for the risk of unsold goods becoming outdated. Depreciation charges gradually reduce the value of these goods on the balance sheet, while ongoing expenses like insurance and taxes must be managed.

For instance, a business holding excessive stock might incur higher costs due to the need for extra storage space and the risk of items becoming obsolete before sale.

Order processing costs are the technological and human capital required to process customer orders accurately and efficiently. The direct costs are associated with the tangible activities and resources needed to process an order, including the labor directly involved in order entry, picking, packing, and shipping, as well as the costs of materials like packaging and labeling. 

Indirect costs might include the amortization of software and hardware used in processing orders, as well as the ongoing maintenance and support of these systems.

For example, during a peak sales period, an e-commerce business may experience a surge in orders. To handle this increase, they may need to hire temporary staff and pay overtime, increasing their direct labor costs. They might also need to expand their digital infrastructure temporarily to handle the increased load on their websites, which could involve higher service fees or additional cloud storage and computing costs. Indirectly, this surge will probably require more energy consumption due to extended operating hours, leading to higher utility bills.

Administrative costs are typically indirect, including salaries of management staff, the cost of deploying logistics software, and other overheads that are not tied to a single transaction but are vital for the overall operations. While potentially less significant in terms of actual expense, these operating costs are as foundational as those outlined above.

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How to measure logistics costs

Measuring logistics costs is crucial for companies to maintain cost-effectiveness and streamline operations. Key performance indicators (KPIs) and metrics offer a clear view of where money is spent within your supply chain and help identify potential savings. Here's a focused approach to quantifying these expenses:

  1. Establish clear KPIs: Identify KPIs relevant to your logistics operations, such as transportation cost per unit, warehousing cost per square foot, inventory carrying cost percentage, and order accuracy rate. These KPIs should align with your company's strategic goals and provide insight into operational efficiency.
  2. Collect data: Accumulate data from various departments—procurement, warehousing, transportation, and customer service. Ensure data accuracy for meaningful analysis.
  3. Calculate direct costs: Determine the total spent on transportation, warehousing, and inventory by adding up expenses such as freight charges, storage fees, and the cost of goods.
  4. Account for indirect costs: Include costs like administrative expenses, software depreciation, and other overheads that contribute to processing logistics.
  5. Analyze the data: Use the data collected to calculate your KPIs. For instance, divide total transportation costs by the number of units shipped to get the cost per unit.
  6. Benchmark and adjust: Compare your KPIs against industry standards or past performance. Adjust operations where needed to reduce costs without compromising service quality.

Regularly tracking these metrics enables you to spot trends, anticipate future costs, and make informed decisions by turning complex data into actionable insights, cost reductions, and efficiency improvements.

How to reduce logistics costs

Reducing logistics costs without compromising service quality requires strategic planning and implementation of effective cost optimization measures. By focusing on efficiency, businesses can streamline processes and save money. Here are strategies to begin achieving this:

  • Consolidate shipments: Combining shipments can maximize load capacity and minimize trips, reducing transportation costs.
  • Leverage technology: Investing in logistics software aids in route planning, inventory management, and operational automation, thus saving time and money.
  • Regularly review vendors: Evaluate your vendors and negotiate better rates or consider alternative suppliers for cost savings.
  • Enhance inventory management: Use just-in-time inventory to minimize carrying costs and reduce the risk of obsolescence.
  • Train employees: Well-trained staff work more efficiently, make fewer mistakes, and can identify areas for improvement.

Though you desire lower costs, your priority when engaging in these strategies should be about making intelligent decisions. Efficiency in logistics will enhance the flow of goods and information, ultimately leading to better customer satisfaction and a healthier bottom line. 

money and boxes

Overall value, cost savings, and boosts in profits are an interplay of many factors. So, you must respect the dynamic nature of your ‘margins.’ Focusing only on ‘cutting costs’ rather than smartly pursuing efficiencies and optimizations will cause you to lose sight of the multiple factors that produce value for your customers and increase your brand, revenue, and competitive price points they’re willing to pay for your services and reputation. 

Optimize your logistics with an integrated management system, like GoRamp

The smartest way to optimize within our technologically laden economy is by finding and using the right tools. Integrating a management system like GoRamp will bring monumental visibility and insights to your logistics operations. 

The advantages of employing a tool like GoRamp include:

  • Enhanced visibility: Track shipments and inventory levels at a glance, ensuring timely decisions.
  • Improved collaboration: Centralized communication streamlines stakeholder interactions, reducing errors and delays.
  • Cost reduction: By identifying inefficiencies and enabling better resource allocation, GoRamp can lead to substantial cost savings.
  • Scalability: As your business grows, GoRamp adapts to your changing needs, facilitating a seamless expansion of operations.

Incorporating such a system centralizes your data to ultimately create a single source of truth for your business—which harmonizes logistics activities and drives cost reductions, all while giving you an agile supply chain that delivers internal value and support. Then, when you operate at world-class levels, the external value to your stakeholders and customers will be unavoidable. 

Are you ready to learn more and take the next step toward logistics excellence? Schedule a demo today with GoRamp!

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