LOGISTICS AND

SUPPLY CHAIN
MANAGEMENT

Day 5: Cost of Logistic Activities

Dr. Ramil David Solis, DBA

Professor

2024 JAN
 TOPIC PRESENTATION

Cost of Logistic Activities

• What Are Logistics Costs?
• 4 Main Types of Logistics Costs
• How to Measure Logistics Costs
• 4 Strategies for Reducing
Logistics Costs
Logistic Cost
v Shipping logistics is the process that
in Business involves handling, managing, and
transporting goods.
v The term “logistics costs”
encompasses all of the expenses
associated with this process.
v It include everything from
purchasing raw materials to paying
a third-party logistics company to
help facilitate distribution.
Take Away about
Logistic cost

v First, logistics cost can vary depending on

the mode of transportation used.
v Second, businesses need to consider both
direct and indirect costs when calculating
their logistics cost.
v Finally, businesses should always look for
ways to optimize their supply chain to
reduce logistics cost.
Types of Logistics Cost
• Inventory costs refer to the cost of
storing goods and materials.

• Transportation costs are the costs

associated with moving goods from one
location to another.

• Warehousing costs are the costs

associated with maintaining and
stocking a warehouse with inventory.

• Customer service distribution costs

are associated with providing customers
with information and support.
Inventory Cost
Inventory costs are all the expenses associated
with ordering, holding and managing the stock
levels in the company.

• Forecasting by using the tools and

technology that help understand the customer
demand allows to make better supply decisions
and calculate the total sales and revenue for
specific time.

• Know optimal times to reorder stock. In

order to calculate reorder points the following
formula can be used: Reorder Point (ROP) =
Demand during lead time + Safety stock.

• Regular Inventory Audits must be conducted

to keep track of stock, monitor holding costs
and inventory depreciation costs.
 Transportation Cost
Transportation moves goods and materials through the supply
chain from one company to another right up to the end user.
Transportation costs take the dominant position accounting for
more than half of the logistics costs.

• Using multiple modes of transportation or switching from

one to another can help offset costs. Mode flexibility allows to
minimize the use of more expensive shipping options as well.
For instance, if the customer needs only the part of the shipment
urgently, the rest can be shipped by less expensive mode.

• Consolidating shipments allows combining several orders

and shipping them in one ride taking into account the
destination, the waiting time for each shipment and keeping the
customers informed about the delivery status of their purchase.

• Bidding for more transportation contracts more often

allows to find better and rates and avoid shortages and
disruptions in transportation.

• Partnering with Transportation Service Provider might help

increase the chances of getting better offers as they have access
to large carrier networks and have considerable experience in
the industry.
Warehouse Cost
Warehouse costs are based on facility, storage space, handling and all necessary services to
operate the facility.

The larger the facility the more people and equipment will be required to operate it.
Customer demand and delivery requirements should determine the right size of the facility.

Warehousing costs include those costs incurred by poor protection of inventory like damaged
goods, theft and misplacements. Using proper inventory control and storage systems will
help to minimize the probability of such causes. The right technology which improves the
efficiency, reduces errors and saves money is key in controlling warehousing costs.

Cross-docking saves time and reduces storage, handling and other associated costs, by
transferring products directly to customer.
 Distribution costs are the expenses spent for storing, transporting and delivering a
finished product to the hand of the customer.
Customer
• Increasing average order size and encouraging customers to consolidate the orders
Service can lower average distribution cost.
Distribution • Instead of sending multiple small shipments, a company can send it all in one big
Cost shipment.
• Avoiding storage of finished products for a longer time.
• Striving to lower the sales returns to control and reduce the costs.
How to Measure
Logistic cost
Once you’ve selected the time frame,
you can begin measuring your costs in
all four categories: warehousing,
transportation, labor, and equipment.
To measure your costs:
1.List all of your expenses as line items This will show you exactly how much your
2.List the exact cost of each expense expenses are in each category. You can add
3.Add up the line items in each the totals for each category together to find
category your overall costs.
4.Add the expenses in each category
together
For example, say you spend $1,000 each month in

rent for warehouse space, and the utilities for the

space cost $600. For that same month, you spent

$1,500 to pay your delivery drivers and another

$2,000 for your warehouse staff. For this month-long

timeframe, your warehousing costs would total

$1,600 while your labor costs total $3,500. However,

this is only half of the total monthly logistics costs. To

find the full costs, you’d also need to account for

transportation and equipment costs.

Assessing your logistics costs can benefit your

business by:
• Giving you insight into precisely how much
you’re spending
• Demonstrating exactly what you’re
spending money on
• Making it easy to identify ways to lower
costs
Strategies
in
Reducing
Logistics
Cost