Logistics Costs You Should Keep Your Eye On
Martin Pahulje - August 03, 2021
Logistics are an extremely crucial aspect of your organization’s business processes. While the traditional supply chain used to be small and straightforward, they have grown into complex and interconnected networks that must be managed accordingly. Today's typical supply chain is flush with technological capabilities spread over a global enterprise, and logistics keep this running smoothly. While these advancements have completely optimized supply chain operations – reducing the cost of procuring raw materials and minimizing manufacturing costs, they do come with disadvantages. The more complex your supply chain is, the more likely it is that you will face complex and expensive issues. To help you prepare for these challenges, we will discuss four logistics costs that you should be aware of.
As any supply chain manager would know, inventory management is a significant logistics cost. Managing supply and demand is a balancing act, and how you manage the number of units in production versus customer demand directly impacts the bottom line. If you stock too much, you eat into valuable cash flow, but if you stock you little, you miss out on potential business. Clearly, this is an important and tricky task.
Bottlenecks often occur in supply chain management as a result of not finding this balance in inventory management. Tracking large volumes of data in real-time is crucial to matching supply with demand successfully, but without a holistic view of your inventory, this is challenging. Furthermore, inventory blind spots can create a negative domino effect in your supply chain, leading to poor forecasting, shipping delays and errors, escalated costs, lost customers, and more. If these implications continue to pile up, the costs will add up significantly and quickly – which could be detrimental to the survival of your business.
Supply chain companies are eager to find a solution to this dilemma, but these issues are difficult to identify based solely on historical data. So, what is a supply chain manager to do? Many traditional supply chain companies track inventory through spreadsheets, but this can actually magnify inventory issues. Because you are dealing with such a significant amount of data, the use of traditional spreadsheets is extremely time-consuming and often leads to human errors. Plus, if you aren’t ensuring that your data is accurate, the significant amount of time spent tracking inventory is futile.
What managers must do instead is utilize predictive models to manage their supply chain inventory. With predictive simulations, this technology can offer new insights into inventory management that support decision-making with real-time and accurate data. With predictive technology, inventory management is simplified – providing you with more reliable information that can save you significantly.
Another essential cost of supply chain logistics is warehousing. To manage this cost, you must be properly measuring performance data, and you can start by evaluating your current performance. Are you currently tracking performance? If so, what metrics are you using? Essentially, what you are tracking is what is getting managed – so make sure you track everything of importance. If you find that you lack warehouse measurements, especially combined with inadequate demand planning, you may be experiencing excess inventory in your supply chains. This could also result from poor forecasting, unexpected demand shifts, product recalls, and more.
However, even if your forecasting is accurate, the issue could be in your warehouse operations as a whole. Do you have too many warehouse staff? Or not enough machinery? Whatever the reason may be, you must find a way to manage and track these fluctuations in real-time. Measuring performance data will help you determine the root of these issues so that you may find a solution quickly, improving management and minimizing costs from now on.
Transportation Mode Shifting
There is no question that transportation costs can add up quickly. Especially when related to mode-shifting and fulfillment, this is a key logistics cost. In the past year, there has been a significant increase in online shopping, which has put a strain on businesses to produce and deliver products in an increasingly timely manner. Every supply chain company has dealt with mode-shifting in some form, but it is becoming increasingly challenging to keep these processes visible over transportation and distribution touchpoints.
When inventory is not managed well, as we discussed earlier, it places a burden on the entire supply chain – especially the transportation department. If a product is not available when an order is placed, expedited shipping is required for the product to arrive on time. This puts stress on transportation and builds costs that would not have existed otherwise. As supply chains grow and become more complex, these indirect costs will become increasingly taxing on your bottom line. For this reason, indirect costs and inefficiencies must be handled from the very start of the supply chain, and they are remedied quickly.
The final cost that you should keep your eye on is that of distribution. These costs include moving inventory throughout distribution channels, which is a common source of inefficiency in supply chains. Significant contributors to your supply chain may consist of vendor inefficiency, vehicle utilization, scheduling, and throughput times. As all of these operations are highly variable in cost, it makes them more challenging to track – making it harder for your business to make informed decisions. When you can't track data, your customer service suffers significantly. Customers may be frustrated that they can't track their order, and you won’t be in a position to provide that information. As a result, these inefficiencies must be optimized, which should be done through tracking.
Reduce Costs Through with Planning Technology
These logistics costs are just the start when in reality, there are countless more significant costs needing optimization. Regardless of which costs you identify and assess, your organization needs to determine a method of putting these insights to use. With each of these costs discussed, it has been proven that predictive modeling and data tracking can resolve them. Predictive modeling and supply chain simulations offer you different approaches to planning and decision-making.
Through the use of historical data and advanced algorithms, these tools can provide you with insights into key business drivers, handing you the opportunity to reduce costs and improve your logistics operations. Digital information tools such as these will allow you to gain visibility into your supply chain. With enhanced visibility, you will see more accurate demand, improve resource utilization, and test scenarios for your supply chain to make the most accurate possible decisions.
In the logistics industry, understanding data as quickly and accurately as possible is a necessity. Early and accurate forecasting of your supply chain is key to embracing the future of logistics and guaranteeing the longevity of your organization. Adopting predictive technology early will give you a significant advantage over competitors, minimizing costs while optimizing logistics practices.
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