11 Key Components of Logistics Costs
Understanding the costs of manufacturing and delivering products to customers helps businesses determine product prices. Furthermore, businesses can determine a reasonable profit margin based on total costs.
Cost accounting is crucial in determining product selling prices and profit margins. The cost of producing or providing a service is called the cost of goods sold (COGS). This cost does not include transportation costs or any other related expenses.
What is Logistics Cost Accounting?
Logistics costs can be defined as all costs incurred by a business in transporting its products. This includes the costs of transporting raw materials from suppliers, storing them in warehouses for timely delivery, transporting finished goods to customers, and all activities related to these processes.
As we can see, this cost involves multiple participants, such as manufacturers, transportation and freight companies, customs brokers, warehouse operators, and other stakeholders. Logistics costs are generally divided into two categories: fixed logistics costs and variable logistics costs.
Costs that do not change continuously, such as rent and taxes, belong to fixed logistics costs, while variable costs fluctuate based on the quantity of goods and other factors. Let’s quickly understand some of the key components of logistics costs.
Components of Logistics Costs
Transportation
Transportation refers to the movement of goods between different locations. This can be the transport of goods from a supplier to a buyer (distributor or retailer), or from a distributor or retailer to a customer.
These participants may be located in different countries or within the same country. Transportation costs typically constitute a large portion of any logistics cost.
Goods can generally be categorized as perishable or non-perishable. Perishable goods may require special transport arrangements, such as temperature-controlled containers and specialized packaging.
The arrangements for transporting perishable goods can be significantly more expensive than those for non-perishable goods. Goods transportation costs are typically calculated per cubic meter.
Warehouse Rental
The demand for storage space is increasing daily. Most goods require storage during their journey from manufacturer to distributor or retailer. Goods are typically stored and unloaded on demand.
Similar to transportation, goods may require specialized storage facilities, such as temperature-controlled warehouses, dedicated shelving, specialized material-handling equipment, and picking arrangements. All of these costs are included in the product’s logistics costs.
Packaging requires packaging materials.
The costs of technology used in modern warehouses, such as warehouse management systems, and the costs of managing these systems, are also part of logistics costs.
Warehouse rent charged to customers typically includes all of these costs and is calculated per square foot of occupied space.
Personnel and Labor
As with all other industries, automation and robotics are increasingly important in logistics. However, the human factor, or labor, remains indispensable.
Humans are needed to operate computers and robots. Certain types of goods and processes inevitably require human handling or decision-making.
Warehouse management and operations are the responsibility of people and cannot be entirely handed over to machines. Similarly, any organization’s customer service or human resources department must have people handling these tasks, as they involve human emotions and decision-making.
All of these tasks incur costs. These costs are considered part of logistics costs and are typically calculated as the human hours consumed in the process.
Logistics as a Profit Center
Traditionally, logistics operations were viewed as cost centers, or simply operations that incurred costs without generating profit. However, the logistics industry has successfully broken free of this stagnation, and logistics operations have proven to be high-profit cost centers. But how was this achieved?
Cost reduction is a major driver of profitability for logistics organizations. Factors such as bulk processing, bulk material procurement, cargo consolidation, and the provision of value-added services are also crucial. Let’s explore some of these factors.
Choosing a Mode of Transport and Carrier
Logistics companies typically select the most suitable mode of transport based on their own and their customers’ needs. To this end, they choose a reliable and competitively priced carrier while ensuring service quality.
Handling Bulk Cargo
Bulk cargo often offers volume discounts from carriers and other operators. To take advantage of these discounts, logistics companies encourage customers to ship in bulk. Customers also benefit from bulk shipping orders because they can obtain volume discounts from suppliers.
Logistics companies often purchase necessary packaging and labeling materials in bulk to enjoy volume discounts offered by suppliers.
Less than Container Load (LCL) Cargo
Less than Container Load (LCL) refers to loading multiple small batches of goods from the same location into a single container, forming a Full Container Load (FCL). Besides protecting goods from potential damage, LCL can help companies obtain volume discounts from carriers or operators.
Shipping goods in FCL can also significantly reduce handling costs and other related expenses. LCL is also known as bundled shipping.
Value-Added Services
These services are offered to customers at no additional cost. Value-added services offered by different companies vary, but the most common value-added services for logistics companies are data reporting and reverse logistics.
Improving customer service and offering a variety of value-added services helps increase customer loyalty and enhance corporate reputation.
Third-Party Logistics (3PL) Services
What are Third-Party Logistics (3PL) services? Third-party logistics (3PL) providers are external service providers that assist businesses in their warehousing and distribution operations.
3PL providers typically focus on various logistics operations, such as transportation and warehousing. Cost savings from choosing the right 3PL provider can help improve a company’s profitability.
Technology
Investing in the right logistics technologies can significantly improve business performance, thereby increasing cost savings.
Currently, the application of data technologies in logistics operations is increasingly widespread, including Enterprise Resource Planning (ERP), Artificial Intelligence (AI), robotics, and automation.
Innovation and Restructuring
Dynamic management helps increase revenue by continuously driving innovation and restructuring processes to meet evolving needs. Continuously monitoring organizational performance and implementing preventative measures to avoid disruptions and mitigate negative trends can prevent losses. If implemented properly, these measures can increase revenue and significantly improve employee productivity.
Each company has a different definition of logistics costs. The best way to reduce these costs and ultimately increase profits is to regularly review the company’s logistics strategy and implement necessary corrective actions.
Plan carefully and negotiate with suppliers and service providers to secure better prices without compromising service quality.
