Maintaining low logistics cost, while ensuring high product performance is key to making your production business profitable. Logistics costs include all costs beyond the basic production costs for a unit. Types of logistics costs include service costs, transportation costs, inventory costs and warehouse costs. (Note: The exact definition and inclusion of costs may vary from business to business, so it is important to check with your company.)
Companies focus on logistics because they essentially add costs to the production of materials, while the cheapest options may decrease the production performance of a company. Measuring logistics costs and performance is important for determining how to best reduce costs and improve the overall production performance. Examine the following components of your total production costs to see where you can make your logistics costs more efficient.
1. Find Total Sales Revenue
Assess your sales in terms of total sales revenue subtracted by the total cost for production, including cost of materials, labor, utilities and space. Refer to this value as profit, as this represents the gross profit during a specific time period, before you calculate the logistical costs. Note that the logistical cost and profit reports start with the profit value and then represent the loss of profits based on logistic complications like service, transportation, warehouse and inventory costs.
For instance, if you have $225,000 in total sales revenue and $45,000 in production costs, you can calculate $225,000 - $45,000 = $180,000.
2. Determine Service-Level Costs
Calculate the service-level costs by determining the unmet consumer demand based on industry restraints. Include production restraints, such as the inability to meet large orders due to time constraints or lost production days. Include ordering delays, such as the time it takes to process an order, delivery time and managing back orders. Include malfunction costs, such as products damaged during delivery, production errors and returned products.
Determine the service-level costs by subtracting the actual number of products sold without return from the total units ordered. As an example, if you had 5500 units ordered, but were only able to fulfill 4800 orders, you can calculate 5500 - 4800 = 700 lost sales.
3. Find Transportation-Level Costs
Determine the transportation-level costs. Divide the total transportation costs by the total sales on the transported products to determine the percentage costs for transportation. Include all transportations costs in this equation, such as payroll for transportation staff, fuel use, insurance costs and maintenance costs.
For instance, if you have the $180,000 in profits during a month and $18,000 in transportation costs, you can calculate $18,000 / $180,000 = 0.10 or 10% transportation costs.
4. Determine Warehouse Costs
Calculate the warehouse costs as the cost of long term storage for produced merchandise. Include the land costs, building costs, utilities, payroll and special costs if your products require special storage conditions, such as cooling. Also, include any additional warehouse space used for out of stock items, which are often stored so your company can reuse them later for parts.
Present warehouse costs in terms of a pure cash value, or represent them as a percentage of your total sales by dividing your warehouse costs by your total revenue from sales. As an example, if your warehouse costs were $27,000, you could calculate $27,000 / $180,000 = 0.15 or 15% warehouse costs.
5. Find Inventory Costs
Determine your inventory costs, as the cost of short term storage for produced merchandise waiting to be shipped and merchandise at your store waiting to be sold. Include the space costs, utilities, labor costs and special arrangements for your products, such as cooling necessities. Present inventory costs in terms of pure cash value or as a percentage of your profits.
For instance, if your inventory costs were $9,000, you could calculate $9,000 / $180,000 = 0.05 or 5% inventory costs.
- Cerasis: Logistics Cost Reduction: 6 Focuses to Create More Profit
- Brightpearl: Understanding Landed Costs & The Profit Margin Formula
- Cerasis: Transportation Accounting: How Understanding Transportation and Freight Costs Leads to Strategic Thinking and More Profitable Business
- AccountingTools: Inventory Cost
Kristyn Hammond has been teaching freshman college composition at the university level since 2010. She has experience teaching developmental writing, freshman composition, and freshman composition and research. She currently resides in Central Texas where she works for a small university in the Texas A&M system of schools.