LogisticsIn the current landscape of business, one of the more pressing challenges is the efficient management of logistics. Regardless of your company's size or structure, whether a small start-up or a multinational corporation, logistics costs impact your bottom line. One of the hardest hurdles businesses encounter is understanding the logistics cost categories and, simply, how to calculate logistics costs.
In this how-to guide, we will clarify the process of calculating logistics costs, describe the factors that affect them, and provide recommendations on their behavior and ways to reduce overall costs. By following this guide, you will be able to state a clear calculation for logistics costs while improving overall supply chain efficiency.
What Are Logistics Costs?
Logistics costs are the sum of costs associated with getting the goods through the supply chain from raw materials to delivery of goods to the customer.
Logistics costs usually include:
- Transportation (shipping, fuel costs, freight costs).
- Warehousing (your warehousing costs- rent, storage, utilities).
- Handling and Packaging (loading, unloading, and packaging materials).
- Inventory Management (stock, insurance, shrinkage).
- Administrative (technology costs, labour, compliance costs).
- Last Mile (The last stage of order fulfilment).
In simple terms, logistics costs are the heart of the supply chain management process, and understanding logistics costs will aid in pricing products correctly and remaining competitive.
Why Calculating Logistics Costs is Important
Accurately determining logistics costs helps companies:
- Identify inefficiencies in supply chain operations.
- Eliminate undue costs, such as unproductive warehouse space.
- Formulate a pricing strategy based on full cost per unit.
- Enhance negotiation with logistics companies based on costs.
- Improves customer satisfaction by balancing cost and level of service.
A clear understanding of logistics costs ensures you are not overspending on supply chain management while overseeing customer expectations.
Step-by-Step Guide to Calculate Logistics Costs
Step 1 – Calculate Transportation Costs
Transportation is typically the largest component of logistics costs. Transportation normally includes, but is not limited to:
- Fuel and freight
- Driver wages and maintenance
- Toll and insurance
Transportation Cost = freight + fuel + labor + maintenance + insurance
Step 2 – Calculate Warehousing Costs
Warehousing is the act of storing goods safely until they are shipped. Warehousing costs include, but are not limited to:
- Rent or lease
- Electricity/utilities
- Security and labor
- Equipment, such as forklifts, racks, and pallets
Warehousing cost = rent + utilities + labor + equipment + security
Step 3 – Calculate Inventory Management Costs
Holding inventory is another driver of logistics costs. The most obvious considerations are:
- Storage fees
- Inventory insurance
- Inventory shrinkage (damaged, expired, or stolen inventory)
- Software or WMS (Warehouse Management System)
Inventory Cost = Storage + insurance + shrinkage + software
Step 4 – Calculate Handling and Packaging Costs
Packaging and handling do two things: make sure the good is protected, and moved. Packaging and handling costs account for:
- Packaging materials (boxes, pallets, shrink-wrap, etc.)
- Labor for packing and handling
- Loading and unloading expenses
Handling cost = packaging + labor + loading/unloading
Step 5 – Calculate Last-Mile Delivery Costs
The last-mile delivery is the total cost from the warehouse to the customer. This includes:
- Delivery drivers' wages.
- The fuel and maintenance costs for the delivery vehicles.
- Any fees from third-party couriers.
Because the delivery volumes are smaller than those of other parts of the supply chain (i.e., delivery systems don't move pallets, only packages), combined with higher customer expectations, last-mile delivery is often the most costly part of logistics.
Formula: Last Mile Delivery = Cost of wages for delivery staff + Cost of fuel + Cost of third party couriers
Step 6 – Add Administrative and Technology Costs
These things are often charged with neglect, but are important too:
- Salaries of employees involved in the supply chain
- IT systems associated with logistics and tracking
- All compliance costs for adhering to government regulations
Formula: Admin Cost = Cost of staff + Cost of systems + Cost of compliance
Step 7 – Total Logistics Cost Formula
Now you can combine everything:
Total Logistics Cost = Transportation + Warehousing + Inventory + Handling + Last Mile Delivery + Admin
And that will give you the TOTAL cost of logistics in your business.
Example of Logistics Cost Calculation
Let's say a company is importing goods and delivering them in India.
- Transportation: ₹4,00,000/month
- Warehousing: ₹1,50,000/month
- Inventory Management: ₹50,000/month
- Handling & Packaging: ₹80,000/month
- Last-Mile Delivery: ₹2,00,000/month
- Administration: ₹70,000/month
Total Logistics Cost = ₹9,50,000/month
Assuming the company delivers 95,000 units a month, therefore:
Logistics Cost per Unit = ₹9,50,000 ÷ 95,000 = ₹10/unit
This aids in pricing the right amount for the product.
Factors That Affect Logistics Costs
- Fuel Prices – Inexpensive fuel decreases transport costs. Rising fuel prices increase transport costs.
- Distance & Location – Longer distances increase costs. Locations that are remote substantially increase costs.
- Storage Duration – Longer periods of storage lead to higher warehousing fees.
- Technology Use – Using advanced WMS or using automation may increase upfront costs, but it typically reduces errors in the future.
- Order Size & Volume – The larger an order is from a supplier or vendor, the less it will cost per unit.
- Customer Expectations – The quicker you deliver goods to your customer, the higher your last-mile delivery costs will be.
Strategies to Reduce Logistics Costs
- Use 3PL Services: Outsourcing Logistics often is less expensive than doing it in-house.
- Optimize Routes: Intelligent route planning can lower fuel costs.
- Use Technology: Technology such as WMS, GPS tracking, and AI forecasting can help companies lessen inefficiencies.
- Negotiate with Vendors: Longer-term relationships with suppliers and transport firms often produce better price stress.
- Consolidate Shipments: When you can, combine small orders into one shipment.
- Invest in Sustainable Logistics: upfront cost may be higher, such as electric vehicles or eco-packaging. However, these costs can be saved in the long term.
Conclusion
Logistics cost measurements are not just about summing dollar amounts; it is about measuring various fast hidden elements affecting a supply chain. Breaking down each transportation cost and determining different aspects of warehousing, including inventory, handling, and last-mile delivery, can provide transparency to a business.
In summary, it is important to accurately calculate logistics costs, monitor regularly, and intelligently optimise kaizen. Companies that monitor their logistics costs can realise savings on costs, but they can also deliver products faster at the right price to gain a competitive edge.
If you need expert warehousing and logistics costs expertise to reduce costs or streamline logistics costs, Sat Kabir Logistics facilitates and provides optimal warehousing and logistical solutions to support supply chain efficiencies while offering transparency and the reliability that a business would expect.