Effective Strategies for Reducing Logistics Costs

Most of the goods for means of production or sale that undergo storage and transportation also come at certain cost. As for the companies business concept, costs in logistics may mean a relevant share of the total costs. They are one of the key factors affecting the outcome of the company, and using specific approaches, organizations can manage the situations with costs of logistic.

Costs in Logistics are More Than Just Storage and Transportation Costs

Costs for logistics processes are a non negligible component of the operating expenses of companies involved in the physical flow of goods and merchandise. Putting the brakes on costs here to increase profit margins is a promising approach. However, it is only effective if logistics expenditure is viewed holistically.

It's not just about how direct storage and transportation costs can be reduced but also about all logistics related processes that occur before, during, and after storage and transportation. Only when all factors are taken into account can you obtain an overall picture of the costs in logistics. And only then can you calculate and reduce them.

Cost Factors in Logistics

Logistics is a complex field, and the costs incurred by a company due to logistics are correspondingly wide ranging. A prerequisite for analyzing the total logistics related costs incurred and tapping into savings potential is considering each process in the operational sequence. In which processes is logistics involved?

The most important factors in detail:

• Storage costs
• Transportation costs
• Packaging costs
• Administrative costs for order processing
• Costs for strategic tasks

Outsourcing or InHouse Logistics?

It has to be noted that when a company is not capable logistically of delivering its solutions on their own, it is a different thing than working with third party service providers. In general, the creation of an in-house logistics department in smaller firms is impractical. This is most especially true for most of the online retailers who are thus reliant on e-Commerce logistics service providers.

Regarding the approaches substantiating the necessity of decreasing costs of internal logistics or outsourcing of the corresponding processes, it should be mentioned that outsourcing may also become one of the ways to decrease such costs. This is the case when a calculation of the financial resources indicate that it is more advisable for a firm to source a transport or warehouse logistics service provider. Cost savings often happen when fixed costs, such as investments in infrastructure and technology, as well as costs for their operation, are eliminated, and companies only pay for the services actually provided.

However, the decision for or against logistics outsourcing is not only about costs but also about control over the processes or the direct line to the customer. For this reason, this article deals with strategies for reducing the costs of in-house logistics and logistics services.

Cost Reduction for Internal Logistics

If there are good reasons for a company to keep logistics in its own hands, then the key to successful cost reduction lies in the area of inventory and process management, transportation management systems. Optimized processes save material, time, and personnel resources and, therefore, money. Warehouse and transport logistics must always be considered together, as the interfaces between the two logistics areas of incoming and outgoing goods must be designed in such a way that the transitions run smoothly.

Despite this overall view, transportation and storage each offer specific approaches to reducing costs.

Lower Costs in Warehouse Logistics

In warehouse logistics, you can optimize processes and save costs through:

• Warehouse logistics controlling based on warehouse KPIs (Key Performance Indicators): Space costs money and the longer certain stocks occupy space, the more expensive it is to store them. KPIs on the inventory turnover rate, throughput times, or storage costs per unit provide information on storage efficiency.
• Matching demand and capacity is key to an efficient and cost saving warehouse. Goods in high demand must always be in stock, while slow-moving items only take up valuable space. Demand analyses, demand forecasts, and coordinated inventory management that harmonize procurement and distribution are prerequisites for sustainable cost reduction in the warehouse.
• Optimized use of space and automated processes intelligent shelving systems and shelving robots enable efficient utilization of spatial capacities improved walking routes in the warehouse or automated picking speed up processes. Automation initially represents an investment that usually pays for itself quickly through process optimization.
• Modern IT solutions all of the points mentioned above require one thing: the use of modern technologies. These include the aforementioned robots, which have long been used in modern warehouses, or drones for inventory management and stocktaking but above all, IT warehouse management systems (WMS). Such systems are not only used for better planning and utilization of capacities or a real time comparison of physical stock and the stock in the inventory management system but also, for example, facilitate KPI monitoring. Logistics control for cost management and cost control would be impossible without modern IT solutions.

Lower Costs in Transport Logistics

Companies with their own logistics fleet cannot influence the fuel price or the level of road tolls and only have limited power over personnel costs during driver shortages. Skilled workers are scarce and need to be paid accordingly. The vehicles themselves also offer only limited savings potential. They have to be purchased, maintained, or repaired regardless of their technology. The subsidy situation for environmentally friendly drive systems has deteriorated in Germany and other European countries, so vehicles with alternative drive systems offer added ecological value but hardly any financial incentives.

In transport logistics, as in warehousing, optimizing processes to save costs is essential. Two starting points are particularly relevant here:

• Optimized route planning to use vehicles, fuel and personnel as efficiently as possible.
• Intelligent load formation which makes optimum use of the loading area depending on weight and size and, in conjunction with route planning, also adjusts the load to the sequence of destinations.

As with warehousing and distribution services, nothing works without IT systems, ideally with the support of artificial intelligence (AI). AI supported route planning uses traffic and weather data as a basis for calculation and can adapt the route accordingly.

Cost Reduction With Outsourced Logistics

The savings potential here depends on the respective logistics model. Whereas previously we talked about in-house logistics first party logistics (1PL) outsourcing is now available in 2PL to 5PL levels: from simple outsourcing of transportation in second party logistics to complex fifth party logistics, where a 3PL company not only takes over all logistics processes but also offers analyses, consulting or big data services.

The more services a partner provides in addition to transport or storage, such as order picking, fulfillment, or returns management, the more fees are incurred, but these are no longer fixed costs and can potentially be reduced with good negotiations. The market is also constantly changing, so service recipients should continuously monitor providers and their products and obtain comparative offers. Attention is advisable, as differences in individual items can make comparisons difficult.

Typical cost items of logistics service providers are:

• Incoming goods
• Warehousing
• Order picking
• Packaging
• Shipping
• Returns

To reduce your freight costs with a 2PL model, you should compare the freight rates of different providers. However, low cost does not necessarily mean long term cost savings if the delivery quality could be better. In the age of e-commerce, delivery is crucial to the customer experience saving money in the short term and losing customers in the long term is not a win.