Today Logistics Management has gained special attention because of high emphasize on quality of goods and services as well as intense price competition which is forcing companies to control the costs to survive in the market.
Logistics Management is conventionally defined as the process that ensures the delivery of the right product at the right place at the right time in right quantities to its customers. Normally when logistics management is talked about, the entire supply chain is considered, from the procurement of raw material to the delivery of finished good and services to customers.
Logistics activities can be categorized as inbound and outbound logistic activities. Activities from procurement to final production are called inbound activities while activities concerned with distribution channel that is delivery of the finished goods and services to the customers from the manufacturer’s place are called outbound activities
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
Keep your scope wider and search for the suppliers of your required inputs who can offer you in more favorable terms. Look for import options also. This does not mean changing the suppliers very frequently but just awareness about such suppliers can strengthen your company’s bargaining power. Always try to negotiate for favorable prices.
Understand the true costs of sourcing. Consider all the costs freight, duty, inventory carrying costs, brokerage involved in procuring. Comparing these costs will help company to decide on the best option.
Work with suppliers on the design and specifications for each order to identify cost savings that allow them to lower their prices.
Switch to lower priced substitutes available for the required inputs.
Try to switch to just-in-time deliveries from suppliers that can lower a company’s inventory as well as internal logistics costs. It may also allow its suppliers to economize on company’s shipping, warehousing, and production scheduling costs that can result in a win-win situation for both the parties.
Transportation
Select the mode of transportation (air, water, rail, road and through pipeline) which best suits the quantity and quality of goods to be supplied and required delivery time. Each mode has its own advantages and disadvantages in terms of costs, speed, capacity, flexibility and safety. Appropriate selection reduces the opportunity costs involved due to unavailability of goods at right time. Loss due to damage to goods during transit can be avoided.
Proper vehicle routing and scheduling can reduce the in-transit inventory. Today various mathematical and analytical methods are available to solve the problems of vehicle routing like shortest route method, transportation method, etc.
Freight consolidation can reduce the transportation cost to a greater extent. In involves bringing together smaller quantities of inventory in order to create a bigger quantity for transportation.
Transshipment
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. Such Panicking often results in higher costs. If the companies just do a little bit of calculating and planning it can determine the amount of goods that are needed immediately and have that amount sent by express service level, while the balance of the shipment can be sent using a standard service level which leads to lower cost.
Inventory
To build up inventory sufficient capital has to be tied up for a length of time. By proper analysis on demand and supply side and nature of the product, such capital cost can be reduced by optimizing the level of inventory. Use scientific method like EOQ (Economic Order Quantity) to decide on order quantity.
Use proper inventory control system.
Try to avail the quantity discounts from raw material suppliers by ordering in a lot.
On the basis of past experience, insure the stock against such contingency as fire, theft, accidents, etc.
Reduce the number of storage points to reduce the total variability in demand. This practice is called risk pooling. The total carrying costs get reduced with a lesser provision of safety stock at different storage points.
4 Step process of lowering logistic costs:
1. Determine the customer service targets and organizational goals.
2. Compute the current logistics costs.
3. Benchmark cost of performing a given set of activities against the best companies in similar business.
4. Develop a plan and implement the lowest cost method that meets the core business needs.
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