How to Measure Logistic Cost & Performance

Maintaining a low logistic cost, while ensuring a high product performance is key to making your production business profitable. Logistic costs include all costs beyond the basic production costs for a unit. This includes service costs, transportation costs, inventory costs and warehouse costs. Companies focus on these costs because they devalue a product after production, essentially adding costs to the production of materials and decreasing the production performance of a company. Reducing logistic costs is an important business focus for improving the overall performance of a product.

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).

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 backorders. Include malfunction costs, such as products damaged during deliver, 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 5,500 units ordered, but were only able to fulfill 4800 orders, you can calculate (5500 - 4800 = 700 lost sales).

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 percent transportation 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 percent warehouse 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 percent inventory costs).

Tips

  • Logistic costs and production costs are two very different values. Logistic costs are additional costs resulting from product handling after production.

References

About the Author

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.