Logistics Costs Types

Types of logistics costs depends on various supply logistics tasks performed within the company. Each task performed in the logistic system incur cost. Strict cost calculation in the logistics systems allows to distinguish them from the overall costs of the company.

Main types of logistics cost

• direct costs (transport, storage, inventory, handling, communications) and indirect costs,
• fixed and variable costs,
• the cost of supply, production and distribution,
• tangible and intangible costs,
• the cost of the development of logistics and projects recommended by the logistics,
• strictly logistics costs.

Logistics costs are expressed in money the consumption of human labour, resources and objects of labour, financial expenses and other negative effects of events. They are caused by the flow of material goods in the enterprise and between enterprises, as well as during maintaining inventories.

According to the criterion of variability we can be on fixed and variable. To fixed costs include, among others, depreciation costs of storage, transportation, cash outflows from taxes and fees. Variable costs are labour costs, costs of involved capital, consumption of materials and fuels. Cost calculation allows to identify the threshold of profitability. Thus it is possible to determine the type and nature of the relationship between these logistics costs and overall company’s performance.

Strategic segmentation and logistics costs

For the purposes of strategic management we distinguish between the analysis of separate market segments:

• operating costs of transport – freight forwarding and movement,
• the cost of maintenance and operation of the warehouse,
• cost of maintaining the inventory,
• costs of unavailability – depletion of stocks and costs of inefficient operation,
• administrative costs.

Logistics costs reflect the consumption of enterprise assets, caused by the planned and unplanned events, implementation and control of technological processes involving moving various materials in time and space.

Cost Relationships

To plan an efficient logistics structure, it is necessary to be aware of the interaction between the different distribution costs, specifically as to how they vary with respect to the different site alternatives (number, size, type and location), and what the overall logistics cost will be. This is best done by comparative analysis of the major alternative configurations. Before this can be achieved, the detailed make-up of the individual distribution cost elements must be understood.

Many companies have cost information based on their conventional accounting systems, but almost always these costs are too general to allow for any detailed break down into the integral parts that reflect the company’s distribution structure.

Without this information, and the understanding that goes with it, it is impossible to measure the effectiveness or otherwise of the existing operation. It is also impossible to gain the necessary insight into the distribution operation to allow for successful planning and management. The component parts of a distribution system necessarily interact with one another to form the system as a whole. Within this system, it is possible to trade off one element with another, and so gain an overall improvement in the cost-effectiveness of the total system. An appreciation of the make-up and relationship of these key costs is thus a vital link to successful distribution planning and operations.

The major cost relationships are outlined in this section, starting with storage and warehousing costs. The major cost breakdown is between building, building services, labour, equipment and management/supervision. The relationship of these costs will, of course, vary under different circumstances – industry, product type, volume throughput, regional location, age of building, handling system, etc. In general, the direct labour cost is likely to be the greatest element, with the building cost likely to fluctuate from very high (new building, prime location) to very low (old building, peppercorn (low) rent, low rates or local taxes).

With respect to the cost relationship of warehousing with other parts of the distribution system, the importance of storage and warehousing costs will be dependent on such factors as the size of the DC and the number of DCs within the distribution network as a whole.

The effect of site size is illustrated by the economies of scale experienced if larger DCs are operated. It has been established that the cost of operation of a site and the amount of stock required to support a DC tend to be higher (per unit) for a small site than for a large one. This is because larger DCs can oft en achieve better space and equipment utilization and can benefit from spreading overhead costs over the higher throughput. With stock-holding, the larger a site, the less buffer and safety stock is required. It should be noted that, eventually, diseconomies of scale could occur, because very large DCs can be adversely affected by such conditions as excessive internal travel distances, problems of management, etc.

The effect of a different number of warehouses or DCs in a given distribution net work can be seen by developing the economies of scale argument. If a distribution network is changed from one site to two sites, then the overall DC/storage costs will increase. The change is likely to be from a single large site to two medium-sized sites. This will not, therefore, double the costs, because the change is not to two large DCs. It will certainly increase costs, however, because there will be a need for more stock coverage, more storage space, more management, etc. Thus, as the number of DCs in a distribution network increases, then the total storage (DC) cost will also increase.

One point that should be appreciated is that some care must be taken over any generalization of this nature. In practice, it will be found that each individual site may differ in its cost structure from the other sites in a system for a variety of practical reasons. These may include, for example, high (or low) rent and rates according to the locality of the DC (eg very high in cities) or high (or low) labour costs.

The two most important categories of transport costs are primary (trunking/line-haul) and secondary (final) delivery. These are affected differently according to the number of DCs in a distribution network.

Delivery transport is concerned with the delivering of orders from the DC to the customer. This can be carried out by a company using its own fleet of vehicles or by a third-party carrier. Whichever alternative is used, the cost of delivery is essentially dependent on the distance that has to be travelled.

Delivery distance can be divided into two types

• ‘drop’ distance, which is the distance travelled once a drop or delivery zone has been reached; and
• ‘stem’ distance, which is the distance to and from a delivery zone.

Whilst the ‘drop’ distance remains the same whatever the distance from the supplying DC, the ‘stem’ distance varies according to the number of DCs in the system.

The primary transport element is the supply of products in bulk (ie in full pallet loads) to the DCs from the central finished goods warehouse or production point. Once again, the number of sites affects the overall cost of this type of transport. In this instance, the effect is not a particularly large one, but it does result in an increase in primary transport costs as the number of DCs increases. The effect is greatest where there are a smaller number of sites.

If the costs for both primary and delivery transport are taken as a combined transport cost then the total transport costs can be related to the different number of DCs in a distribution network. The overall effect of combining the two transport costs is that total transport costs will reduce, the greater the number of sites that there are in the system.

Inventory Costs

Another important cost that needs to be included is the cost of holding inventory. The main elements of inventory holding. The key costs can be broken down into four main areas:

• Capital cost – the cost of the physical stock. This is the financing charge, which is the current cost of capital to a company or the opportunity cost of tying up capital that might otherwise be producing a return if invested elsewhere.
• Service cost – that is, stock management and insurance.
• Risk costs – which occur through pilferage, deterioration of stock, damage and stock obsolescence.
• Storage costs –as storage and warehousing costs

The final cost element for consideration is that of information system costs. These costs may represent a variety of information or communication requirements ranging from order processing to load assembly lists. They may be manual systems but are more likely to be computerized. These costs are less easy to represent graphically because of the fast rate of change of information systems and because costs can vary considerably dependent on the level of technology introduced.

By its very nature logistics operates in a dynamic and ever-changing environment. This makes the planning of a logistics structure a difficult process. By the same token, it is not an easy matter to appreciate how any changes to one of the major elements within such a structure will affect the system as a whole. One way of overcoming this problem is to adopt a ‘total’ view of the system, to try to understand and measure the system as a whole as well as in relation to the constituent parts of the system.

Total logistics cost analysis allows this approach to be developed on a practical basis. The various costs of the different elements within the system can be built together. This provides a fair representation, not just of the total logistics cost, but also of the ways in which any change to the system will affect both the total system and the elements within the system.

Trade-off analysis

The concept of trade-off analysis is a key feature of this total cost approach to logistics planning. It has been shown that any change in one of the major elements within a logistics system is likely to have a significant effect on the costs of both the total system and the other elements.

By the same token, it is oft en possible to create total cost savings by making savings in one element, which creates additional costs in another but produces an overall cost benefit.

The cost and service trade-off s within any logistics structure will, of course, vary from one company to another depending on the role the company plays within the supply chain as a whole.

In the main, however, the following major costs and their associated trade-off s may need to be considered and assessed:

• Production costs These will vary according to the type of production process or system used and the type of product manufactured. Make-to-stock or make-to-order will also be relevant. Factories may be ‘focused’ on one or two specific types of product or may make a large range of different products. Different distribution structures may be required to support different types of product. The effect on primary transport costs will be very relevant.
• Packaging costs These are mainly concerned with the trade-off between the type of packaging and the handling and transport costs. The type of load unitization will also be important.
• Information systems costs These cover a wide area from order receipt to management information systems. The type of DC network will affect many of these costs.
• Lost sales costs These might occur because of inadequate customer service, and are very relevant in the context of the proximity of the DC to the customer, together with the reliability and speed of service.
• Inventory costs These include the cost of capital tied up in inventory as well as the cost of obsolescence, etc. They have a fundamental relationship with the DC network in terms of the number of stock-holding points and the hierarchy of stock-holding according to DC type.
• Transport costs The number and location of sites within the distribution structure, and the associated throughputs significantly affect transport costs. Both primary transport and final delivery costs are affected by DC numbers and location.

Warehousing costs These costs vary according to the type of storage and handling systems used, together with the volume and throughput at the site. The size and type of site will thus be important, as will the location.