Strategies to reduce costs in logistics and supply chain management

Jonas Mehrhoff

Logistics and supply chain cost covers the total of all the costs incurred in taking a product from the market to the end-user. These costs are the embodiment of countless moving parts, and the result of key decisions supply chain leaders and their teams make every day. Global logistics expenditures represent about 10-15% of the total world GDP but vary significantly depending on the level of economic development. With this in mind, supply chain leaders need to ask themself: Do you know how high your global supply chain costs are? Which areas work efficiently and which areas consume enormous costs? As a supply chain leader, it’s imperative that you see exactly where your spending money, and if the areas you invest in are producing value.

What are the main drivers of global logistics and supply chain costs 

The bulk of global supply chain costs lies in transportation, inventory, and warehousing. These three areas account for 92% of all logistics and supply chain costs; with transportation being the highest cost at 58% followed by inventory carrying costs at 23% and warehousing costs at 11%. 

Transportation costs relate to the costs of moving the goods physically from point of origin to point of destination. This includes the first-mile, mid-mile, and last-mile, which are affected and influenced by freight rate fluctuations from the selected transport mode used for the shipment. Inventory costs include the costs of holding stock, including costs of the operation inside the warehouse, insurance, packaging, labelling, shortages, loss, and damages. It is ultimately impacted and influenced by the amount of goods stored in the warehouse and the movement of goods in and out of the warehouse. Warehousing costs include the costs of running a warehouse and the maintenance of its utilities. This is impacted and influenced by the size, location, and number of facilities that the company operates globally. 

Supply chain leaders must take these cost elements into account and work on strategies to reduce these key logistics and supply chain costs.

Cost reduction strategies for global supply chain leaders

To achieve cost savings in logistics and supply chain it is essential to fully understand the spectrum of the company’s global supply chain operation. As a supply chain leader, you should have all the required details available and develop a thorough understanding of the costs related to running the global supply chain, including variable and fixed costs. Fixed costs cover warehouse rent, warehouse equipment, ancillary costs and loan repayments, while variable costs include employees, both in-house and contract workers, and packaging and fuel, among other things. The last mentioned elements can vary based on cargo volume handled. Creating a matrix of cost vs. volume that incorporates both fixed and variable cost elements create transparency, ultimately allowing for any unexpected deviations to be addressed. 

Transportation costs

Transportation costs can be reduced in a variety of ways. Better truck or container utilization can lead to a reduction in the number of shipments throughout the year, which has a direct impact on your costs.  Another lever for reducing costs is the consolidation of goods to avoid multiple trips either to the same customer or to different customers in the area. The consolidation of goods also reduces damage by avoiding multiple handling at different locations.

Route optimization helps to ensure that trucks and containers move in the most optimal way from source to destination, which not only leads to reduced transportation costs but also reduced fuel consumption, that have a positive impact on the environment.  

Adopting a hybrid freight negotiation strategy can be very effective and reduced costs as well. Depending on volumes, companies can lock in favourable rates and space on a contract basis, but also have the option for spot rate business. In times of market volatility, having an approach that can be easily adopted is crucial.  

Utilizing benchmark market rates for the various routes and a well thought out RFQ (Request for Quotation) process with a diversified pool of carriers and forwarders will help spread the risks compared to using a single partner. Having back up options if the preferred carrier is not able to provide the services is a crucial outcome. RFQs keep existing carriers at market level, as they understand that they must challenge themselves to keep up with the market or they could lose the business. 

By partnering with carriers and forwarders who share the same values and principles on timeliness, environmental values, expertise and pricing, companies can ensure they get the best deal both economically, ecologically, and socially. 

Inventory costs 

The best way to reduce inventory carrying costs is to have full visibility of all the stock throughout the supply chain including warehouses, goods in transit and on return. Companies that don’t have this visibility run the risk of additional un-budgeted costs, selling stock they don’t have, and losing sales because they couldn’t see the stock. By maintaining a close watch on inventory levels, companies can prevent overstocking which will reduce inventory carrying costs. SKU intensity is a big contributing factor to inventory overstocking, especially in industries apparel and other retail goods. 

Real-time visibility into inventory is crucial to identify items that are not moving, sales information, replenishment metrics, the actual status of the various SKUs will help control costs that could otherwise be wasted on items that don’t contribute to the company’s success. By making sure inventory as per the demand planning is present, companies can avoid having to expedite the transportation of goods to the customer at much higher prices due to the urgency of the delivery. These costs could easily run to twice or three times the normal rate. 

When building stock, especially on fast-moving items, it’s crucial for companies to look at the economies of scale and apply volume discounts. Consolidating stock purchases can reduce supply chain costs, as well as administrative and warehousing costs. 

Warehousing costs

In any warehouse setting, automation is key to reduce logistics costs. By automating repetitive manual processes, a warehouse can reduce staff requirements, consolidate operations, allocate resources to high product demand areas, and ensure that the warehouse operations run efficiently while controlling costs. In combination with a modern and agile WMS, automation helps to: 

  • Better utilise available floor-space in the warehouse 
  • Increase storage density in bins and racks  
  • Improve vertical space utilization 
  • Optimize the warehouse operations directly linked to labor performance and efficiency 
  • Identify, organise, reduce, and eliminate empty space

A balanced and optimized warehouse network design is another important lever to reduce warehousing costs. Deciding on one or more warehouse locations is an important strategic decision that directly impacts the cost structure of a company's supply chain. It's important to strike a balance between a convenient location near the center of gravity of your customers and a reasonable rental price. While not an easy task, it is worth investing time and effort to set up the most efficient warehouse structure, as this not only has a significant impact on inventory costs, but also on customer satisfaction and transportation costs.

Supply chain leaders should measure and review warehousing costs regularly. This encompasses all the costs related to warehouse operations, including labour, rent and utilities, equipment, shelving and pallet racks and technology. Before going the route of cost reduction in warehousing as a means of cost-saving, companies should analyze the impact of cost reduction in this crucial area as it could impact other areas of the supply chain. 

Conclusion

To optimise costs, supply chain leaders must prioritize improving the operational outcomes as a mechanism for cost-saving, rather than look at cost reduction, as this could impact service levels and creates friction among stakeholders. Supply chain leaders can take proactive steps by monitor KPIs, develop, and implement cost analysis models that can identify and facilitate cost-saving measures. 

Successful and efficient cost management of global supply chains nowadays depends on access to real-time information, full operational transparency and supply chain analytics to enable data-driven and fast decisions. Digital supply chain platforms come with various capabilities such as real-time visibility, predictive and cognitive analytics, and paperless documentation integrated into actionable dashboards to capture and report cost-savings potential in all aspects of a supply chain.  

If you work with global supply chains, here are ways we can help you gain full control and visibility over your shipments.
If you’re operating with spreadsheets and disparate sources of data, learn more about how a digital platform can provide you with supply chain visibility in this free guide.
If you’d like to learn more about how to leverage your ERP with a supply chain platform, check out our free guide.
For more supply chain best practices, visit our resources page.  
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