Logistics Cost

Logistics is the set of activities that gets the right product to the right place at the right time. Each activity has a cost, and the costs are often spread across different departments, so the total can be hard to see.

Gathering them together is the first step to managing them. The main components are transportation, warehousing, inventory carrying cost, order processing and packaging.

Transportation includes freight, fuel, driver wages and carrier fees, while warehousing covers rent, equipment, labour and utilities. Inventory carrying cost is the price of having money tied up in stock, plus insurance, shrinkage and obsolescence.

Logistics costs can be split into inbound, which covers moving raw materials or goods to the business, and outbound, which covers delivering to customers. There are also reverse logistics costs, for returns, repairs and recycling.

In accounting, some of these costs sit in cost of goods sold and others in operating expenses, depending on the policy of the company and the accounting framework. There are trade-offs.

Using faster transport costs more but allows less stock to be held, while using more warehouses reduces delivery time but increases fixed costs. The goal is the lowest total logistics cost for a given service level, not the lowest cost in any single category.

Because the costs sit in different places, many companies underestimate them. A finance team that traces them from the ledger and builds a single view can find savings in route planning, packaging, carrier contracts and stock levels.

It can also prove to the board how much of the selling price is spent on moving goods rather than making them. Technology and data make the numbers easier to manage.

Transport management systems record the cost of each shipment, and warehouse systems track labour and space by order. Linking these to the ledger lets the finance team allocate logistics cost to products, customers and channels, so that the real profitability of each can be seen.