No doubt, the logistics process is extremely complicated. What is even more complicated is calculating the costs that are incurred throughout the logistics process.
There are different stages in the supply chain, such as warehousing, transportation, inventory management, etc. Each stage costs you some bucks and it depends on multiple factors.
Plus, if you often deal with cross-border shipping, you’ll need to take care of different types of duties and taxes that increase your expenses. Overall, managing logistics costs is extremely tricky and confusing, especially for the new eCommerce business owners.
With this in mind, we’ve come up with a detailed breakdown of different types of logistics costs that you should consider. At the same time, we’ve listed down 5 effective tips to manage these costs, so you can keep your profit margin intact without any compromise on the service quality.
Let’s get started!
But First, What Are Logistics Costs?
Logistics costs are the total expenses that come with the process of logistics handling. To put it more simply, managing each stage of the supply chain, like product sourcing, inventory management, order processing, and fulfillment, needs different types of expenses. These associated costs are known as logistics costs.
Different Types of Logistics Costs that Businesses Need to Know
Here’s a list of different types of costs that are associated with logistics:
1. Shipping, transportation, and delivery costs
The process of moving the product from one place to another is one of the most fundamental activities performed by a logistics company. It involves the shipping of products via air, water, and land and finally the delivery of the product to the consumer.
Businesses spend significantly in getting the product from the source to their base of operations, which may include halts in the middle. Once the products reach the seller, expenses are then incurred in getting the products into the hands of the end consumer.
These costs mostly include freight charges, fuel charges, driver fees, charges for hiring a 3PL carrier, etc. Note that these charges can fluctuate as per the mode of transportation, volume of shipments, shipping distance, and the transit time customers have demanded.
2. Storage and inventory management cost
Products need to be stored in locations that allow businesses to understand their inventory and manage it accordingly. The costs involved with the storage process include the expenses incurred while building the necessary infrastructure for self-owned facilities, or the expenses incurred in the form of rent to lease a place for warehousing.
Apart from that, the maintenance and other activities in a warehouse cost extra charges. For example, if you want to purchase or rent warehouse equipment, like pallet jacks, forklifts, etc, these will cost you extra over the basic charges.
Now, if you are an enterprise business managing huge inventories, you may also need to adopt automation technologies in the warehouses for better operational efficiency. Again, this will increase the cost of warehouse and inventory management.
3. Costs related to order processing
Though you won’t have to pay a huge amount for order processing, still you need to make it count. The order processing costs mainly include paying the laborers who pick, pack, and inspect the goods, technology charges such as investment in a barcode scanner, etc.
In addition, it also involves the pricing of packaging materials, such as cardboard boxes, bubble wrap, cushioning materials, tape, etc. If you offer custom packaging options to your customers, you’ll have to source the custom materials that might cost you extra.
4. Customs duties and taxes
You’ll also have to consider duties and taxes since they significantly influence the overall logistics cost. Custom duty is mainly a tax that has been imposed by the government of the importing country.
Apart from that, other taxes, such as VAT, excise taxes, and anti-dumping duties may also increase the total cost.
How much you’ll have to pay as customs duties and taxes mostly depends on the product type and the imported country’s regulations.
5. Reverse logistics and returns management
Managing the return process is undoubtedly a complicated affair. Since it makes the entire logistics operation work in reverse, efficiencies become low and costs become high.
The process takes a major chunk of time and income from businesses to address and recover returning items while subjecting them to the same external risks that were present during the initial delivery.
Throughout the reverse logistics process, again, you’ll have to pay for the transportation, product refurbishment, disposition, inventory management, etc.
6. Costs related to other services
As your business grows and a huge number of orders come in, you’ll have to pay extra attention to your logistics process, which increases the logistics costs.
Take multi-carrier management as an example. If you deal with various carriers, it will automatically increase the cost. On the other hand, if you invest in other technologies and software systems, such as shipping software, order management solutions, and warehouse management solutions, you’ll have to plan a bigger budget for your logistics.
But, if you’re a small business dealing with a lower volume of orders, you may not include these costs.
7. Team management costs
Last but certainly not least, you’ll have to take into account the costs of team management. At each step of the process, there is some manual workforce involved.
Be it for warehouse management, order processing, or handling freight, you need a team and you’ll have to pay each member from time to time. So, it’s another type of logistics cost you must consider.
How to Manage Logistics Costs: 5 Effective Tips
At this point of time, you are well aware of the different types of logistics costs and why they are incurred. Indeed, you can’t cut them if you want to improve logistics efficiency.
But, you can tactfully manage them, so they fit in your budget. How? Look at the below-mentioned tips:
1. Choose the right logistics partners
Logistics partners play an important role in improving the operations of any business. If a partner fails to meet your expectations, the results can hamper the bottom line. There are a number of logistics partners available on the market. Not all of them do what they promise.
So, while choosing a carrier partner, check the following aspects:
Check whether it provides competitive and affordable pricing without any compromise on the service quality.
Check their customer reviews to evaluate their reliability.
Evaluate if it aligns with your logistics goals and offers value-added services to improve efficiency.
2. Split your total inventory
It’s one of the smartest moves that you can ever take. Warehousing facilities help businesses sort through their products and allow enterprises to understand their inventory.
The cost of logistics can be reduced if companies are able to strategically spread their inventory across multiple locations depending on their target demographic and product performance.
Let’s understand this with an example. Suppose you’re a US-based company and most of your orders come from the US, India, and Middle East.
Now if you establish your warehouses across India, the US, and the Middle East, you can reach your customers faster and decrease expenses in fuel surcharges and transportation costs.
3. Strategically source products
Improving product sourcing can solve a multitude of problems and reduce costs. A source that is closer to the base of operations allows companies to avoid long-distance movement of products. This enables businesses to receive their products and also saves on the cost of shipping, taxes, and duties.
Another strategy that you can adopt is the Just-in-Time (JIT) approach. In case you are not aware of it, JIT is a product manufacturing method, where merchants source products only when they’re necessary.
This way, you can reduce recurring transportation costs that are incurred when the products are shipped from the manufacturers to the shipper. In fact, you can also reduce extra inventory management costs.
4. Optimize the transportation process
As you already know transportation costs eat a huge chunk of profitability. However, if you adopt some smart strategies, you can reduce transportation costs to a great extent which will further reduce your overall logistics costs. These include:
Strategically plan the transportation routes. Take the paths that will help you reach the destination in the fastest way possible, so you can reduce fuel costs. Apart from that, you can also take the routes through which you can fulfill multiple shipments in a single trip.
Adopt the shipment consolidation method to optimize logistics costs.
You can also leverage the intermodal transportation approach to lower costs.
5. Go for a shipping software
Apparently, you might feel that going for shipping software is adding another layer of expense. But in reality, it’s the opposite. It’s more like an investment that will help you lower the logistics costs.
If you do a bit of research, you’ll also find that most companies even offer discounted shipping rates. Plus, they also reduce manual labor costs and automate most tasks like shipping labels and AWB numbers generation. In fact, they also take care of failed deliveries, so you can save costs on returns.
Final thoughts!
Knowing about logistics Costs is important in the modern business environment. Shippers must assess their situation and strive to improve their logistics operations in order to enhance revenues as a result of reduced costs. Otherwise, it will erode their profit margin along the way.
Hope this guide has given you enough information on how you can manage logistics costs strategically without any compromise on efficiency. Good luck!
