Cost of logistics: A Review

Finding the hidden cost of any logistics operation or management can be tricky. But we can start from the factors and then examine the causes.

As a supply chain or logistics manager, one of your primary tasks is cost reduction of the logistics system.

To reduce costs, we quickly pour over our logistics analysis costs, finding areas we can capitalize on by eliminating and restructuring. But what happens when these costs are hidden and difficult to identify?

In my experience, no matter how much we pour into our logistics processes, the total effect of the logistics system cost can be challenging to identify. It generally takes a bit of time before we can correctly identify them. 

Although hidden costs are a nuisance, sometimes, these costs are beyond our control. Sometimes, it may require an overhauling of the supply chain system to eliminate them permanently. 

In this article, I point out a few factors and causes of the logistics costs I have observed.

 

Factors affecting the cost of logistics

Factors that affect hidden logistics costs can sometimes be external or internal to the supply chain. By their nature, external factors mean we have no direct control over them. However, we can strategize our logistics to get around them, externally or internally. 

 

1. Transport Infrastructure

Infrastructure plays a significant role in the flow of the supply chain, and this role is mainly enforced in the transportation arm of the supply chain. Transportation infrastructure could be external and internal. 

External transportation infrastructure entails roads, bridges, Seaports, railways, and Airports. External transportation infrastructure is heavily dependent on the Government. If the roads are bad or the seaports are clogged, they significantly inhibit your logistics flow. 

However, it doesn’t mean we must sit back and wait for the government. As logistics managers, we have to innovate. Amazon faced a similar challenge at the height of the pandemic, and they could bypass it. 

Internal transportation infrastructure is one that we have total control over. As a logistics manager, you can always find ways to reduce excesses. Even from your logistics vehicles, logistics tracking, or fulfilment centres, there are a lot of areas you can analyze and improve on.

 2. Communication and Supply chain visibility

Miscommunication and lack of visibility in your supply chain can be quite costly to your logistics operation. Mixing up orders, wrong information, poor timing, and working blindly are all symptoms of poor communication in logistics. 

Supply chain visibility allows every personnel or department within the logistics division access to real-time information on the state of the logistics process. This, in turn, lets everyone adjust or tackle future disruptions or changes. 

Working blind in any supply chain or logistics process can be a nightmare. To combat this, focus on Communication and supply chain visibility. When carried out effectively, they work together and will help your department reduce costs significantly.

 3. The right people or professionals

Being surrounded by the right people can make all the difference in your bid to cut costs as a logistics manager. People with poor logistics skills within the supply chain will increasingly make mistakes, costing the logistics tons of money. They also slow down the logistics process because of a lack of skills. 

One quick way to get around this issue is by training staff, having a robust HR, and keeping them updated on the new developments and innovations in the supply chain.

 

What are the Causes of these hidden costs of logistics

The hidden costs of logistics are those costs within our logistics that are difficult to identify.

 

1. Excessive packaging cost

While it is important to package our products properly to prevent damage, it can also be detrimental to the cost of logistics. Here are two reasons why. 

Excessive packaging tends to add weight and take on space. If you use an external freight service or mode of transportation where you pay for weights and space, you quickly realize the extra packaging will cost you significantly more over long periods. 

Excessive packaging also affects the size of containers or space needed to transport your product. Renting or acquiring larger containers because of excessive packaging also costs the supply chain.

 2. Poor transportation strategies

Poor planning or implementation of transport strategies is another way to rack up costs in your logistics. When there are cases of poor transport strategies, it is because we do not properly utilize our transportation or logistics infrastructure. 

For example, two trucks leave the fulfilment centre, heading to roughly the same area for delivery. However, both trucks are half empty. In this scenario, you pay twice for that transportation. 

Another symptom of poor transportation strategies that bleeds your logistics financially is poor route management. With the aid of technology, we can quickly route vehicles to avoid delays and traffic. 

Multiple variables resulting from poor routing can cause several supply chain crises. 

Underutilized or underwhelming transport strategies are usually a result of poor planning and communication resulting from a lack of supply chain visibility.

3. Damaged shipments or product returns

Whenever goods are damaged or returned, it automatically doubles the logistics cost of that product, sometimes triples it. These costs include delivery, returning, and sometimes replacing it. 

It may seem negligible initially, but consistently damaged shipments or product returns would eventually add significant sums of money.

 4. Undesirable contract terms

When sourcing partners for your logistics or supply chain, it is important to go through contract terms with a fine-toothed comb to prevent capitulating to any term you disagree with, eventually costing you money. 

Contract terms can be tricky, especially when dealing with new partners. Always seek the services of a lawyer.