Logistics Cost

In a competitive market, firms require more accurate and detailed logistics cost information from their cost accounting systems to work out the cost-benefits analysis of their logistics strategies in order to design a cost-effective supply chain. Logistics managers require detailed information to determine how different products, customers or supply channels affect the costs of providing logistics services. The detail and complexity of the cost information will depend on the diversity of products handled, customer requirements or supply channels used. The cost components that are considered for computation of logistics cost are listed in Table 20.1.

The increased visibility of logistics costs will serve several purposes for the firm, such as identi­fication of direct costs, better understanding of price/volume relationships, opportunity to address significant cost reduction measures, better evaluation and justification of investments in new tech­nologies and giving more attention to these costs.

Logistics cost will become more important in product pricing decisions, as firms seek to reduce costs and attain a competitive advantage. The requirement for more accurate information will drive several changes in the firm’s cost accounting system. Today, with competitive pressure, firms require a more sophisticated cost allocation system to reflect accurately how costs are incurred and to perform profitability analyses of customers. However, logistics cost data generally do not exist in readily accessible or useable form. Many of the costs required for a product or customer profitabil­ity analysis remain hidden in vendor invoices or buried in other cost centres such as manufacturing or marketing. Hence, to increase the visibility of logistics costs, firms should adopt the following approach:

• Conduct a process value analysis of key processes
• Develop costs for key activities in logistics
• Develop precise costs associated with logistics processes
• Develop an ongoing cost management system to monitor process costs

The accounting and control of logistics costs must also make some additional adaptations to support integrated logistics management within the firm and across the supply chain. The evalu­ation of possible cost trade-offs within logistics requires the identification, measurement and com­parison of several factors such as:

• Identifying cost drivers or logistics activities and their behaviour
• Measuring cost drivers in sufficient detail to understand the cause and its effect on activities
• Measuring the interaction of cost
• Identifying specific service levels for the customer
• Finding out the correct trade-offs among the logistics and service levels
• Evaluating the above without compromising service quality

The information obtained on costing supports key logistics decisions on warehouse space, ware­house locations, choosing the type of warehouse and implementing automation. The integrated logistics management approach will require not only more accurate costing of logistics functions from its cost accounting system, but the integration of available cost data and the ability to perform total cost analysis, both within logistics and across all major processes (such as production and mar­keting) to reduce the incidence of cost to the firm. Porter argued that:

“A firm must look beyond its internal actions to reduce costs and explore the linkages between suppliers’ value chains and a firm’s value chain to identify opportunities for enhancing a competitive advantage.”

The logistics system must be viewed as a complete system, from the sourcing of raw materials to delivery of products to customers. Each component of the logistics system is linked with, and influ­ences, the operations of the other components. Traditional costing systems have typically ignored costs outside the factory in product costing. Hence, the costing methodology for analyzing costs and value in the product distribution chain must deal effectively with the following elements of distribution:

• Various functions performed by each party in the distribution chain
• Principles that guide operations and operating practices
• Implications of operating practices on resource effectiveness
• Resources deployed for performing the operations
• Units of resource consumption

The management of logistics costs will also require the capability to evaluate the value of alternative channel structures. Logistics analysis will require a cost trade-off capability within the channel to determine the most cost-effective allocation of resources or to exploit linkages within the channel by eliminating non-core activities. Customer costing necessitates identifying and deter­mining all of the costs involved in supporting and maintaining a customer.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.