Logistics:

Logistics is the management of the flow of goods, information

and other resources in a repair cycle between the point of origin and
the point of consumption in order to meet the requirements of
customers. Logistics involves the integration of information,
transportation, inventory, warehousing, material handling, and
packaging, and occasionally security. Logistics is a channel of the
supply chain which adds the value of time and place utility. Today the
complexity of production logistics can be modelled, analyzed,
visualized and optimized by plant simulation software.

Introduction:
There have been a lot of discussions both in business and
research world about the cost efficiency and the importance of
logistics performance. Companies are constantly trying to find out
ways, how their cost structure could be lowered, and how the fixed
costs can be transformed to variable costs. On the other hand
customers are expecting price reductions and high performance of
operations where total quality plays an essential role. This external
and internal pressure drives companies to find out new and
innovative activity models in their daily operations.

Outsourcing of logistics partly or completely has become a

normal way of doing business and in trying to solve the above-
mentioned challenges. Companies are concentrating especially their
resources on core activities, and in metal industry the spare part
logistics services are outsourced increasingly to external service
providers. The decision whether a customer-company is willing to
outsource its spare part logistics operation lies on expected
economic savings among some other issues. It seems that,
generally speaking, companies seem to have problems to calculate
their real costs of logistics operation, or the calculation does not
take into account all necessary cost factors. This may lead to
difficult price negotiations and in the worst case the outsourcing will
not be realized due to incorrect cost-calculation information.

In order to reach a fruitful collaboration between a customer-

company and a logistics service provider it is the interest of both
parties to understand the costs involved in the investigated logistics
operations. And in the long run the parties’ should try to find new
activity models in finding innovative logistics solutions and cost
efficiency.

I. Cost:
So the Logistics cost is the expenses incurred by the company
on the activities of Logistics. These may be high or low on the basis of
the efficiency of these activities.

Logistics processes whether efficient and inefficient — impact

revenues, bottom line profits, the balance sheet, production
schedules, human resource productivity and the technology that
drives non- logistics parts of the organization.

It has been indicated that every operation in the organization

has its cost attached to. The personnel, facilities and the operations
collect expenses incurred and derive the cost. The expenses involved
in logistic activities are such that it is generally difficult to collect the
expenses incurred against them. They are as follows:

(1) Transportation cost:

Transport system makes goods and products movable and

provides timely and regional efficacy to promote value-added under
the least cost principle. Transport affects the results of logistics
activities and, of course, it influences production and sale. In the
logistics system, transportation cost could be regarded as a restriction
of the objective market. Value of transportation varies with different
industries. For those products with small volume, low weight and high
value, transportation cost simply occupies a very small part of sale
and is less regarded; for those big, heavy and low-valued products,
transportation occupies a very big part of sale and affects profits
more, and therefore it is more regarded.

(2) Inventory cost:

Inventory is a list for goods and materials, or those goods and

materials themselves, held available in stock by a business. It is also
used for a list of the contents of a household and for a list for
testamentary purposes of the possessions of someone who has died.
In, inventory is considered an asset.

In business management, inventory consists of a list of goods

and materials held available in stock.

(3) Warehousing cost:

Warehousing costs are levied by the warehouse owners and are

an unavoidable expense for the companies that use the space. The
owners should be conversant with the applicable charges. In years to
come, users will find it increasingly mandatory to implement near line
storage, to reduce their data warehousing costs and make data
analysis more efficient and effective.

As the warehouses grow in number and provide more services,

determining the cost of the company gets more difficult. Basic costs
need to be understood, even if there is a third party involved. There
are generally three types of expenses involved and they should be
understood, while calculating the costs.

(4) Local delivery cost:

 It includes cost for delivering goods from the place of production
to the place of consumption.

(5) Order processing cost:

The activities related to filling a customer's order - checking the order,

prices, terms, customer credit and stock levels; producing an invoice;
picking the goods from the warehouse; packing and shipping them.

• Conventional Costing Method:

In the conventional costing method the expenses are collected in

such way that all the factory expenses are apportioned to calculate
the product cost. By this the efforts are to get the idea to find the
product pricing. Here the direct expenses are easy to get, but indirect
expenses are difficult to get. This method of costing is difficult to find
the expenses of logistic activities.

• Activity Based Costing:

Activity-Based Costing

Doing Things Doing the

Right Right Things
Performing Activities Choosing the Activities We
More Should
Efficientl Perform
y Product design
Activity Management Product-line
Business process and customer
Reengineering mix
Total quality Supplier relationships
Performance Customer relationships
Measurement Pricing
Order size
Delivery
Packaging
Market segmentation
Distribution channel
Logistics Cost Reduction:

Logistics cost form an important part of the overall cost structure in

any organization. Focus needs to be on renegotiating freight and shipping
rates, reduction in overall freight costs and streamlining operations. There
are six best practices that can be followed by most businesses to reduce
costs.

1) New carriers: Constant market rate check is a best practice.

Usually, logistics managers get into a comfort zone with the existing
carriers. This leads to cost creep. Market rate check will bring to
light other more economical operations. New carriers may be more
flexible in their quotes.
2) Freight costs: There are several options to optimize freight costs.
Renegotiation of minimum billing to a minimum for a zone needs to
be explored. Product delivery coordination is another useful tool to
streamline freight costs. Today both the USPS and Canada Post offer
viable options for small packages. Arrangements with a number of
smaller local carriers sometimes provide the best rate/best service
combination. Internet offers excellent tools for comparing and
optimizing freight costs
3) Improve shipping and receiving: Streamlining shipping and
receiving practices will offer substantial savings. This can happen
through reduction of window time for receiving. Starting point
should be mandating delivery appointments. A flow chart needs to
be made of all the operations to determine wasteful processes and
combining existing processes.
4) Technology: Internet tools enable substantial reduction in
paperwork. Documents are scanned and emailed to customs, ports
etc. In case of cross border trade, documents needs to reach at
least twenty four hours in advance to avoid delays at the border.
Technology also allows coordination of all shipments to optimize
loading.
5) Managing returns: Reverse logistics is an important element of
freight costs. Most companies offer a liberal returns policy. If the
customer is not satisfied with the product, it can be returned in 30,
60, 90 days depending on the seller. At times, the seller also
 arranges to pick it up. To minimize costs associated with reverse
logistics processes needs to be streamlined.
6) Audit of freight costs: Use specialized agencies that provide post
payment audit of freight bills. These agencies are usually paid on a
profit sharing basis. These audits also provide valuable insight into
patterns and other cost reduction opportunities.

II. Performance Measurement:

“Failing to plan is planning to fail”

Why is it necessary to Evaluate Logistics Performance?

Evaluation of performance is important for any business; especially

taking into account post crisis realities of the recession hit economy.
Competition is getting tougher and that is why every company needs to
make sure it efficiently spends every dollar. Most large production and
sales companies have own logistics departments or use services of
logistics companies. At a first glance, the work of the logistic department
seems very simple. One should take a unit or a product and take it to
another place. But in fact, shipment expenses may exceed the prize of
the delivered product itself which makes it two times expensive. A logistic
department spending too much money on delivery of products and
cargoes makes the whole companies suffer losses and increase prices for
products. As known, prices fall many products include transportation
costs.
(2) Methodology for Measurement

It is essential to improve the system. Once the list is finalized to

identify the areas of improvement, it has to be finalized where to attack.
For that matter different techniques are to be used, like brain storming,
80- 20 theory paraetto principle, etc.

• Have a “scoreboard”:

• Use standardized methods.

• Fix and stick with the targets.

• Adopt a holistic approach.

• Work on the right things.

Logistics Productivity:

Following is the process for logistic productivity:

1. Logistic resources:

Productivity depends upon resources. Resources like

working persons [workers], inventory cost, transportation
system, etc which are required for production . All this resources
incurred costs or expenses.

2. Logistics operation:

After resources are allocated next step is operation or

process for production. Production is done and is supplied to
customers and gets response from customers about product.
Operation includes transportation, supply to customers, inventory
management, customer response, warehousing for storage
purpose.

3. Logistic output:

The last step of logistic productivity is output. Logistic output can

be achieved by getting perfect orders and appropriate storage
capacity. This largely depends on sales.
Bibliography:
• Wikipedia

• Logistics Cost Structure And Performance In The New Concept By

Pasi Kivinen – Anita Lukka

• http://www.logistics-management-kpi.com/