Cost of logistics & Cost on Logistics

Presented By :
Priyanka Saha Priyabrata Sharma Rajib Sarkar

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.

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

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.

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.

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 DESTINATION

POINT OF ORIGIN

I.N.C. = INPUT NODAL COST N.A.C. = NODAL ACTIVITY COST F.C. = FLOW COST B.C. = BARRIER COST

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

HOW TO GENERATE REVENUE?

Basically in a logistics firm (enterprise), revenue is generated through three key elements. They are Manufacturer Warehousing decision

Customer

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 therefore generate revenue for the firm.

Warehousing Decision
Another element which helps in generating revenue is the warehousing decision. A manufacturer must decide whether to have a private or a public warehouse. In order to reduce costs alone, it is obvious to build a private warehouse. The initial benefit of having a private warehouse is the direct cost savings in per unit warehouse charges. It also deals with the reduced labor force. The employees that were laid off could perform the functions with extensive training which would help employee morale. The sales personnel could have their offices in the private warehouse which would eliminate the necessary outside contact with the public warehouse personnel. Management could have a greater control on the operations including inventory management. The distance and route to the site are similar to the public warehouse. But there are certain drawbacks of private 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 a private or a public warehouse which will directly affect the revenue generation.

Customers
In order to be effective, a logistics system must achieve a level of each attribute of customer service performance. This is possible only when there exists 3 key factors Availability- providing a product or material on predictable basis. Performance- ability to achieve a predetermined speed, consistency and flexibility 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.

10 Tips for Reducing Logistics Costs:

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
1.

EXAMPLE
Analysis of revenue and cost for a specific customer
100,000 90,000 20,000 70,000 3,000 1,000 3,000 7,000 63,000 Less distribution costs: Order processing Storage and handling Inventory financing Transport Packaging Refusals 500 600 700 2,000 300 500 4,600 58,400 1,500 500 2,000 56,400 10,000

Gross sales value Less discount Net sales value Less direct cost of goods sold Gross contribution Less sales and marketing costs: Sales calls Co-operative promotions Merchandising

Customer gross contribution Less other customer-related costs: Credit financing Returns Customer net contribution

CONTD

In 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 business than without it.

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 costing methods 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.