Strategies to reduce logistics and supply chain costs

Jonas Mehrhoff
Jonas Mehrhoff
June 1, 2022
5 min read

Note on the authors

Heiner Murmann is the founder and CEO of Orkestra SCS, a logistics, technology and services company. In addition, Heiner serves as Executive Chairman for Evolution Time Critical and President of The Five Inc., and as an Advisory Board Member for both Metro Supply Chain Group and Black & McDonald Limited. Notably, Heiner previously held various senior executive roles at DB Schenker, one of the top three global logistics companies, as a Member of the Board of Management responsible for Air and Ocean Freight, and as CEO of the Region Americas.

Arnold da Silva, Senior Ocean Freight Advisor for Orkestra SCS, is head of an ocean freight consulting company where he actively advises global shippers on ocean freight strategy and execution. With 40 years of experience in the ocean freight industry, Arnold served as Executive Vice President for Ocean Freight Region Americas for DB Schenker. Arnold's passion is to conceptualize and implement innovative ocean freight solutions that transform one’s supply chain and promote a shipper's success.

Logistics and supply chain cost is the total of all the costs incurred in taking a product from the market to the end-user.

Global logistics expenditures represent about 10-15% of the total world GDP, but vary significantly depending on the level of economic development and the orientation of the economy, such manufacturing, natural resources, agriculture or services.

Transport Systems: Main logistics and supply chain costs

The bulk of 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 impacted and influenced by fluctuations in ocean and land freight.

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 volume of stock and the movement of goods in and out of the warehouse.

Warehousing costs include the fixed costs of maintaining the warehouse and the maintenance of its utilities. This is impacted and influenced by the size, location and number of facilities that the company operates.

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

Strategies to reduce logistics and supply chain costs

The first step to achieving cost savings in logistics and supply chain is to fully understand the spectrum of the company’s supply chain operation. As a supply chain manager, you should have all the details available and develop a thorough understanding of the costs related to running the supply chain, including variable and fixed costs.

Fixed costs

Including warehouse/ equipment rental, utilities, loan repayments, while variable costs include items like labour, packaging, and fuel. These elements can vary based on cargo volume handled. Creating a matrix of cost vs. volume that incorporates both fixed and variable cost elements creates transparency , ultimately allowing for  any unexpected deviations to be addressed.

Transportation costs

Transportation costs can be reduced through better truck utilization, whether in the form of FTL or LTL. Cargo can also be consolidated to avoid multiple trips to either the same customer or other customers in the area/region. Consolidation also reduces damage due to multiple handling at different locations.

For instance, adopting a hybrid freight negotiation strategy can be very effective. 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.  

Route planning helps ensure that the trucks move in the most optimal way, increasing truck utilization, reducing fuel consumption and having a positive impact on the environment.  

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

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

Inventory costs

The best way to reduce inventory carrying costs is to have full visibility of the stock throughout the chain (inhouse, 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 can be advantageous 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 and optimising repetitive manual processes, a warehouse can reduce staff requirements, consolidate operations, allocate resources to high product demand areas, and ensure that customers are satisfied while also controlling costs.

A digital supply chain platform that incorporates or integrates with a WMS (Warehouse Management System) can help in:

  • Providing solutions to better utilise available floor-space in the warehouse
  • Assists in increasing storage density in bins & racks  
  • Improves vertical space utilization
  • Organisation of warehouse operations directly linked to labor performance and efficiency
  • Identifying, organising, reducing, and eliminating empty spaces

It also helps to have DCs (Distribution Centers) which are close to major consumer markets and intermodal terminals, decreasing movement between warehouses and reducing transportation cost. This proximity also gives the company the ability to serve a large area from one location instead of having multiple warehouses.

Supply chain managers should also 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 analyse the impact of cost reduction in this crucial area as it could impact other areas of the supply chain.

While transportation costs remain the highest composition of logistics and supply chain costs, non-spatial components such as inventory and labour costs can also be considered as major components that influence supply chain and logistics costs.

Key take-aways

There is a direct correlation between cost reduction and customer satisfaction, as cost is one of the major pain points for many customers. Companies must look at the total cost of ownership (TCO), encompassing all the costs associated with every aspect of the supply chain rather than looking at them in silos.

In order to optimise TCO, supply chain managers should focus on 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 managers can take proactive steps by monitor KPIs, develop and implement cost analysis models that can identify and facilitate cost-saving measures.

Successful and efficient supply chain management depends on access to real-time information and supply chain analytics to enable data-driven strategies and for supply chain leaders to make data-driven decisions. Digital supply chain visibility platforms come with various capabilities such as automation, predictive and cognitive analytics, and paperless documentation to make supply chains more efficient and cost-effective.

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Strategies to reduce logistics and supply chain costs

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