Page 38 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 2: Introduction to Logistic

The percentage of logistics cost to the total value added signifies the importance of logistics Notes
related activities from the cost perspective. It is high for bulk goods manufacturers, while it is
low for consumer goods manufacturers. For bulk goods, total logistics cost as a proportion of
value addition is about 70 per cent, out of which transportation costs constitute nearly two-
thirds.
Four main areas of logistics management are procurement, transport, transshipment and storage
of goods. Supply chain logistics costs account from 5% to 50% of a product’s total cost, depending
on the industry. Following are the tips to reduce cost in these four areas:

Procurement

 Streamlining sourcing techniques: Understand the true costs of sourcing, which include:
 Freight

 Duty
 Inventory carrying costs
 Brokerage involved in procuring
 Order management: It includes understand various specifications and design order
requirements with each suppliers, which will help in identifying ways of reducing cost
and also help in reducing price structure. Other methods include: switching to lower
priced substitutes, implementing just-in-time deliveries from suppliers that can lower a
company’s inventory as well as internal logistics costs, which in turn also allow suppliers
to economize on company’s shipping, warehousing, and production scheduling costs,
which could be beneficial for both.

Transportation

 Selecting of appropriate mode of transportation: Each mode has its own advantages and
disadvantages in terms of costs, speed, capacity, flexibility and safety, therefore selecting
optimal mode of transportation (air, water, rail, road and through pipeline) which can
best suits the quantity and quality of goods to be supplied and required during delivery
time reduces the opportunity costs involved due to unavailability of goods at right time.

 Loss due to damage to goods during transit can be avoided.
 Optimal vehicle routing and scheduling can reduce the in-transit inventory. Various
mathematical and analytical methods like shortest route method, transportation method,
etc. can be used for optimizing accompanying cost.
 Freight consolidation can also reduce the transportation cost to a greater extent. It involves
bringing together smaller quantities of inventory, in order to create a bigger quantity for
transportation. All these methods are elaborated further in coming sections.

Transshipment

It mainly involves controlling the express shipping costs, typically when a company have an
entire shipment sent on an express service level basis for which higher cost is incurred. This can
reduced by proper planning and by calculating amount of goods required for immediate delivery
by express service and can distribute the costs accordingly.

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