Logistics costs free essay sample

Logistics cost form an important part of the overall cost structure in any organization. Focus needs to be on renegotiating freight and shipping rates, reduction in overall freight costs and streamlining operations. The following are the measures (ways) that can be used to reduce cost in logistics New carriers: The use of Constant market rate check is a best practice. Usually, logistics managers get into a comfort zone with the existing carriers. The organization should look on other carriers which offers lowest cost of transportation. Market rate check will bring to light other more economical operations. New carriers may be more flexible in their price. Freight costs: There are several options to optimize freight costs. Renegotiation of minimum billing to a minimum for a zone needs to be explored. Product delivery coordination is another useful tool to streamline freight costs. Arrangements with a number of smaller carriers also provide the best rate/best service combination. We will write a custom essay sample on Logistics costs or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Internet offers excellent tools for comparing and optimizing freight costs. Improve shipping and receiving: Streamlining shipping and receiving practices will offer savings. This can happen through reduction of long time for receiving. Starting point should be mandating delivery appointments. A flow chart needs to be made of all the operations to determine wasteful processes and combining existing processes. Technology: Internet tools enable substantial reduction in paperwork. Documents are scanned and emailed to customs, ports etc. In case of cross border trade, documents needs to reach at least twenty four hours in advance to avoid delays at the border. Technology also allows coordination of all shipments to optimize loading. This minimize delays in delivery. Managing returns: Reverse logistics is an important element of freight costs. Most companies offer a liberal returns policy. If the customer is not satisfied with the product, it can be returned in a certain period depending on the seller. At times, the seller also arranges to pick it up. There should be streamlined processes so as to minimize costs associated with reverse logistics. Audit of freight costs: Use specialized agencies that provide post payment audit of freight bills. These agencies are usually paid on a profit sharing basis. These audits also provide valuable insight into patterns and other cost reduction opportunities. Deborah Catalano Ruriani explained other ways (measures) of Cost reduction as: 1. Eliminate supply chain bottlenecks. By periodically reviewing and analyzing their supply chain networks, companies can be able to pinpoint issues and proactively address them. Strategies to reduce or eliminate bottlenecks include addressing vessel schedule planning, ensuring proper documentation and regulatory compliance for imports and exports, and revamping network design. 2. Reduce inventory at the port, manufacturing sites, and warehouses. Companies often stock excess inventory because they lack supply chain visibility. To effectively reduce excess inventory, you have to gain reliable information on future orders. Visibility software can help. 3. Cut demurrage and detention fines. While an occasional fine may not seem like much, these costs can add up. Auditing carrier bills and tracking where issues occur in the supply chain can substantially cut fine payments. 4. Identify opportunities to shift modes. Without adequate visibility into logistics operations, a company may not realize that an air shipment could move by sea at a much lower cost. Companies that use technology to evaluate modal options typically see a five- to eight-percent cost reduction. 5. Use postponement strategies to divert inventory at an international gateway. A successful postponement strategy can dramatically lower forecasting errors as well as improve customer service by reducing out-of-stocks. Companies also can cut transport costs by reducing inventory misallocations and shipping more items in bulk. 6. Use preferential trade agreements. Companies that take advantage of preferential status can save millions in duties and taxes. A software system that automates the qualification process can save time and effort, as well as improve compliance and data accuracy. 7. Rebalance supply and fulfillment networks by determining tax-efficient sourcing and distribution strategies. Companies must periodically review their supply chain networks to assess duties and logistics costs, labor costs, regulatory controls, and global political climates. By comparing geographic options, taking into account the costs and regulations of each option, companies can optimize their supply chain. 8. Become a self-filer. Using technology to connect electronically with brokers lowers entry filing costs and reduces manual entry errors. It also can enable pre-clearance of goods at borders and reduce the number of staff needed internally to manage logistics operations while boosting productivity hence reduce cost. 9. Contro l your procurement process. By implementing a process-based workflow that includes tracking and managing order acceptance, consolidating invoices, creating shipments and generating documents— and by extending that process to trading partners— companies can reduce cycle times, cut supply chain execution costs, and better support compliance initiatives. 10. Implement performance management metrics and tools. Companies need a system, data, and tools to benchmark actions and make informed decisions. Developing a performance management process allows companies to manage service providers and critical cycle times to lower costs and continually improve performance 11. Understand the true costs of sourcing overseas. Calculate freight, duty, brokerage, and inventory carrying costs to support these lengthened supply chains. Also factor in such items as the costs of engineers flying overseas. Once you understand the true total landed cost and total impact to the business 12. Focus on eliminating the variability out of transit times. The more variable the transit times are, the more likely it is that the receiving party is using more premium freight, building buffers of inventory, or ordering more often and more quantity than necessary to compensate for the uncertainty. Understanding these dynamics can lead to the conclusion that paying higher freight costs to insure higher variability actually saves your company in total costs. 13. Control your express shipping costs. Typically when a company runs into a supply chain issue, it will have an entire shipment sent on an express/expedited (highest cost) service level basis. Panicking often results in higher costs. If the company would just do a little bit of calculating it can determine the amount of goods that are needed immediately and have that amount sent using express/expedited service level, while the balance of the shipment can be sent using a standard (lower cost) service level. 14. Informed decision-making. Provide to the decision-makers/customers of your logistics network the cost of freight for each service level, the reliability of each lane for each service level, and the true cost of carrying inventory so they can make informed decisions. People generally want to be good corporate citizens and will select the less expensive option that still meets their needs CHARACTERISTICS OF COST REDUCTION (HARD COST SAVINGS) The following are the characteristics of â€Å"Hard† cost savings, which is understood as tangible bottom line reductions are: year-on-year saving over the constant volume of purchased product/service, actions that can be traced directly to the Profit and Loss Account, direct reduction of expense or a change in process/technology/policy that directly reduces expenses, process improvements that result in real and measurable cost or asset reductions, examination of existing products or services, contractual agreements, or processes to determine potential changes that reduce cost, and net reductions in prices paid for items procured when compared to prices in place for the prior 12 months or a change to lower cost alternatives. COST AVOIDANCE (SOFT COST SAVINGS) â€Å"Soft† cost avoidance is much more difficult to define. The following are Suggested definitions, which includes: Cost avoidance is a cost reduction that does not lower the cost of products/services when compared against historical results, but rather minimizes or avoids entirely the negative impact to the bottom line that a price increase would have caused, when there is an increase in output or capacity without increasing resource expenditure, in general, the cost avoidance savings are the amount that would have been spent to handle the increased volume or output, and Cost avoidances include process improvements that do not immediately reduce cost or assets but provide benefits through improved process efficiency, employee productivity, improved customer satisfaction, improved competitiveness, over time to mention the few, cost avoidance often becomes cost savings. N. B: Cost avoidance is a cost reduction that results from a spend that is lower than the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken. This accounts for the situations where spend is higher due to higher demand but overall cost per unit is lower, where up-front investments reduce overall spend in one or more categories over a multi-year initiative, and where a process improvement or product replacement resulted in a lower operating cost or cost per unit compared to what the company would have spent had the company not improved the process or replaced the product. To Sum up, if the organization adopts this open definition of cost avoidance, and maintains a document of common examples and their associated metrics, which is updated each time a new type of project is encountered that could result in a cost avoidance, the organization can fully quantify the â€Å"hard† and â€Å"soft† savings delivered by the sourcing team to the management team. Measures of Cost Avoidance: Resisting or delaying a supplier’s price increase, this is one of the ways of cost avoidance whereby the organization use techniques to resist or delay supplier price increase in avoiding cost. Use of purchase price that is lower than the original quoted price, The organization purchases its requirements at a lower price than what was initially quoted by the supplier so as to avoid cost. Value of additional services at no cost, the firm makes sure it avoid or prevent cost by making sure after sale services are obtained for free for instance installation, free training. Long-term contracts with price-protection provisions,the firm enters into long term contracts with the aim of cost sharing with the supplier. Introduction of a new product or part number requiring a new material purchases and spend is lower. COST REDUCTION CHALLENGES Some of the challenges faced by a company as they seek to assess cost reduction include: Cancellation of net savings due to an increase in the business unit’s cost structure, Supply management’s role in the cost savings allocation decision, Chronology of supply management’s involvement and the need for budget cuts, Visibility, in terms of systems, people, and metrics, Total Cost of Ownership (TCO) concept for purchases items/services, Multi-year issues in cost savings, and Creating a proper incentive structure for supply management personnel. TYPES OF COST REDUCTION AND AVOIDANCE The following are types of cost reduction and avoidance that need to be recognized as valid cost savings. This section presents some types of cost reduction and cost avoidance that can contribute significantly to the organization’s bottom line. Negotiated Discounts against Material Cost Increases If the products being sourced are primarily made from a commodity whose average market price or index has increased significantly since the last sourcing cycle, and a buyer manages to negotiate a price that increases less than the increase in underlying material costs since the last sourcing event, this is a valid cost avoidance. Substitution If a buyer manages to find another product that performs the same function, or is able to collaborate with a supplier to produce a functionally equivalent specification that is more economical to produce, then the buyer has obtained a cost reduction on behalf of the organization.. Waived Fees This form of cost avoidance is quite self-explanatory. For example, if a supplier normally charges an installation fee for a new piece of equipment, but the buyer is able to negotiate free installation, than this would be an example of cost avoidance of the waived fee variety. Another example would be free training or services. However, this is one example where the cost avoidance is not equal to what the vendor quotes, but what the market average for the service is.. Inventory Reduction This occurs when the buyer comes up with a strategy to reduce the inventory that the organization needs to hold at any given time. Since all inventories is associated with a carrying cost, inventory reduction often represents significant cost savings to an organization over time. Inventory can be reduced when a buyer finds a supplier who can handle a shorter lead time or when inventory is turned over to a vendor who specializes in inventory management (Vendor Managed Inventory). Process Improvement Processes consume overhead, and overhead costs money. Thus, any significant process improvement could represent a significant cost avoidance to an organization. However, unlike the other types of cost avoidance, process improvement cost reductions can be a bit tricky to evaluate. The key is to look at the average number of units of product or work produced per day, week, or month prior to the improvement and the number of units of product or work produced per day, week, or month after the improvement and calculate a percentage improvement N. B: By doing this, the organization will have clearly defined cost reduction efforts, tied them to savings, defined their relative importance, and defined the share of the credit that will go to supply management in a cross-functional initiative. The organization will also have avoided the problem where the team over concentrates on finding â€Å"hard† dollar savings, which is a serious problem if raw material and energy costs keep rising significantly and the largest savings potential is in the â€Å"soft† savings realized by long-term process and product improvements. Transloading to Maximize Cost Savings By Deborah Catalano Ruriani Tags: Transportation Management Transloading offers a cost-effective way to bring ocean containers inland to distribution centers. By transferring cargo without sorting the contents for shipment to a single destination, transloading services can reduce total landed costs, and—when combined with value-added services such as palletizing and shrink-wrapping—reduce handling at the destination. Jeff McCorstin, senior vice president of air and ocean products for UPS Global Freight Forwarding, offers these tips for maximizing savings with transloading services. 1. Understand general transloading rules. Transloading offers the greatest cost savings when ocean containers can be consolidated into fewer, larger domestic trailers. The cargo in three 40-foot ocean containers typically fits into two 53-foot domestic trailers. 2. Ensure overall transportation savings outweigh additional handling costs. Sometimes the savings are negated for destinations located farther east from the U. S. West Coast discharge port. 3. Consider palletizing cargo during transloading. To best use space in ocean containers, cargo is rarely palletized at the point of origin. Palletize during the transloading process to improve distribution center (DC) handling efficiency. 4. Factor transloading into transit time estimates. Unloading, handling, and reloading ocean container cargo near the port of discharge takes time. Allow up to three days to ensure customer delivery commitments are met. 5. Ensure your cargo fits the bill. Transload operators charge additional fees for containers with more than a certain number of cartons. The additional costs for containers with several thousand small cartons could offset any transportation savings. 6. Ensure handling flexibility by making Customs entry at the port. While it is a common practice to clear ocean containers at their final inland destinations, it is better to make entry at the port of discharge. This ensures maximum flexibility in handling cargo, and eliminates the need to move the shipment in-bond, saving additional costs. 7. Increase supply chain efficiency with merge-in-transit offerings. This type of deconsolidation allows importers to combine products arriving in containers from different origins/shippers by transloading near the port of arrival into domestic trailers. And if importers source from domestic suppliers—who may also have product arriving via container—this cargo can be merged in transit to arrive together at the designated DC. 8. Use transloading to expedite delivery to final destination. Transloading near the port of discharge provides the flexibility to bypass DCs and speed delivery to the end customer. The reduced DC handling charges and improved time in transit can help trim supply chain costs. 9. Avoid costly containers. Instead of shipping less-than-containerload, 20-foot, or light-loaded 40-foot containers from multiple overseas vendors to your inland DC, ship fully loaded/optimized containers to a single container freight station near the port of discharge. From there, they can be transloaded, merged in transit with other inbound cargo, and shipped to the final destination using the transport mode that best fits the importers needs. 10. Set up transloading programs in advance. Having your service provider involved in coordinating with the origin forwarder translates into better service levels and reliability. Flexible Structure Flexible operations are preplanned contingency strategies to prevent logistical failures. A typical emergency occurs when an assigned shipping facility is out of stock or for some other reason cannot complete a customer’s order. For example, a warehouse may be out of an item with no replenishment inventory scheduled to arrive until after the customer’s specified order delivery date. To prevent back-ordering or delivery cancellation, a contingency operating policy may assign the total order, or at least those items not available, for shipment from an alternative warehouse. The use of flexible operations is typically based on the importance of meeting the needs of a specific customer or the critical nature of the product being ordered. A flexible logistics capability that has gained popularity as a result of improved communications involves procedures for serving predetermined situations as part of the basic logistical strategy. The flexible logistics rule and decision scenarios specify alternative ways to meet specific service requirements, such as assignment of the order to different shipping facilities or changing methods of delivery. A strategy that utilizes flexible operations is common practice in four different situations. First, the customer designated delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities. Customers located at such points offer the supplying firm an opportunity to fully utilize available inventory and logistical capacity. Orders can be serviced from the facility having the best inventory position or the available transportation capacity to achieve timely delivery. This form of flexible logistics offers a way to fully utilize system capacity by balancing workloads between facilities while protecting customer service commitments. The benefit is operating efficiency, which is transparent to the customer, who experiences no service deterioration. A second situation justifying flexible distribution is when the size of a customer’s order creates an opportunity to improve logistical efficiency if serviced through an alternative channel arrangement. For example, the lowest-total-cost method to provide small shipment delivery may be through a distributor. In contrast, larger shipments may have the lowest total logistical cost when shipped factory direct to customers. Provided that alternative methods of shipment meet customer delivery expectations, total logistical cost may be reduced by implementing flexible policies. A third type of flexible operation may result from a selective inventory stocking strategy. The cost and risk associated with stocking inventory require careful analysis to determine which items and how much to place in each warehouse. With replacement parts, a common strategy mentioned earlier is to stock selected items in specific warehouses with the total line being stocked only at a central facility. In general-merchandise retailing, a store or distribution center located in a small community may stock only a limited or restricted version of a firm’s total line. When customers desire nonstocked items, orders must be satisfied from an alternative facility. The term master facilities is often used to describe inventory strategies that designate larger facilities for backup support of smaller restricted facilities. Selective inventory stocking by echelon level is a common strategy used to reduce overall inventory risk. The reasons for selective stocking range from low product profit contribution to high per-unit cost of inventory maintenance. One way to operationalize a fine-line inventory classification strategy is to differentiate stocking policy by system echelons. In situations following such classified stocking strategies, it may be necessary to obtain advanced customer approval for split-order delivery. However, in some situations firms that use differentiated inventory stocking strategies are able to consolidate customer orders while intransit for same-time delivery, thereby making the arrangement customer transparent. The fourth type of flexible operations results from agreements between firms to move selected shipments outside the established echeloned or direct logistics arrangements. Two special arrangements gaining popularity are flow through cross-docks and service supplier arrangements. A cross-dock operation involves shipments from multiple suppliers arriving at a designated time at the handling facility. Inventory receipts are sorted by destination across the dock and consolidated into outbound trailers for direct delivery. Cross-dock operations are growing in popularity in the retail industry for building store-specific assortments and are common methods of continuous inventory replenishment for mass merchants. Cross-docking of merchandise direct from manufacture to a customer’s retail store eliminates the work and cost associated with utilizing distribution warehouses. Another form of flexible operations is to use integrated service providers to consolidate products for delivery. This is similar to consolidation for transportation purposes discussed in the previous section of this chapter. However, as a form of flexible logistics, specialists are used to avoid storage and handling of slow-moving products through the mainstream of the echeloned logistics structure. Such service providers can also provide important value-added services. For example, Starbucks Coffee Company has a long standing relationship with OHL, a logistics service provider. Starbucks has approximately 17,000 company-owned and licensed retail outlets. OHL provides logistical support to Starbucks by offering the typical range of 3PL services plus technology support. This operating relationship has existed for over a decade. Figure 2. 5 introduces flexibility to the logistical operating structures previously illustrated. A prerequisite to effective flexible operations is the use of information technology to monitor inventory status throughout the logistical network and provide the capability to rapidly switch methods for servicing customer orders. The use of flexible operations in emergency situations has a well-established track record. The overall improvement in information technology is resulting in flexible operations becoming an increasingly important part of basic logistics strategy. Cutting Costs From Your Logistics Budget By Tags: Supply Chain Management If you want to reduce logistics costs, you have to take the time to review your processes. Nathan Pieri, senior vice president of marketing and product management for Rutherford, N. J. -based Management Dynamics, offers these tips for trimming your logistics budget. 10 tips for reducing supply chain logistics costs Aug. 9, 2005 Bernie Hart EMAIL Tweet Comments 0 As companies continue to manufacture and source materials from overseas, controlling costs remains a top priority for those involved in international trade. One key factor that should be monitored more closely is logistics management, which covers all activities relating to the procurement, transport, transshipment and storage of goods. Depending on the industry sector, supply chain logistics costs account from 5% to 50% of a product’s total landed cost. Some issues effecting logistics costs: Fuel prices remain high and ports continue to experience delays, resulting in higher transportation fees. Increasingly complex international trade laws and security measurements threaten to lengthen delivery times and increase warehousing costs. According to a recent report by TechnologyEvaluation. com, a typical air-freight shipment takes eight to twelve days. Of this, the cargo is en route only 5% of the time. The rest is spent sitting in warehouses waiting for the required documents and compliance checks. Following are 10 Tips on Reducing Supply Chain Logistics Costs: 1. , that domestic buy may look a lot better. Sourcing from Ohio to your U. S. plant, distribution center or customer may, in the long run, be more cost effective than sourcing from China. 23. Tariff engineering. Strategically source and manufacture products to take advantage of classification duty rates and eligibility for special trade programs such as NAFTA. 4. Consolidate. If you have multiple suppliers in one country, consolidate their goods into one shipment. In addition, if you always have LCL (less than container load) shipments out of one country, try to find another LCL importer of goods from that country. You may be able to partner and consolidate to a more cost-effective FCL (full container load) shipment. 5.. 6. Sometimes insurance doesn’t pay. Often when a company has a shipment of premium goods they tend to use the Carrier’s Insurance. Carriers Insurance is very expensive. If the company is self insured, which most companies are, they should check their insurance policy to see if it covers shipment of goods. If it does, then they do not need to add the extra cost of Carrier’s Insurance. 7. Automate compliance processes. Companies that implement software solutions to automate trade compliance are able to speed the cycle times associated with tasks being performed manually, such as document preparation, and eliminate the associated errors. Automated compliance procedures also bring fewer delays at border crossings, resulting in on-time delivery, adequate inventory levels, increased customer satisfaction, and the avoidance of fines. 8.. 9. Planes, trains and automobiles. Which is cheapest? In general, rail is more cost-effective than trucking or air. Water is cheaper than air shipment. No matter the mode of delivery, always try to get three quotes for movements. 10. Be aware of non-tariff trade barriers. Companies need to be more aware of the increasing level of non-tariff trade barriers that are in force to reduce sweat shop labor and support human rights and animal welfare issues. These restrictions can bring importers increased liability and compliance costs.