Reducing Costs in Logistics: Strategies for Companies

The storage and transportation of goods, whether they are goods for sale or means of production, inevitably incur costs. Depending on a company's business model, costs in logistics can account for a relevant proportion of total expenditure. Reducing them is an effective lever for improving the company's results, and businesses can control their logistics costs with targeted measures.

Costs in Logistics are More Than Just Storage and Transportation Costs

Costs for logistics processes are a non-negligible component of the operating expenses of companies involved in the physical flow of goods and merchandise. Putting the brakes on costs here to increase profit margins is a promising approach. However, it is only effective if logistics expenditure is viewed holistically.

It's not just about how direct storage and transportation costs can be reduced but also about all logistics-related processes that occur before, during, and after storage and transportation. Only when all factors are taken into account you can obtain an overall picture of the costs in logistics. And only then you can calculate and reduce them.

Cost Factors in Logistics

Logistics is a complex field, and the costs incurred by a company due to logistics are correspondingly wide-ranging. A prerequisite for analyzing the total logistics-related costs incurred and tapping into savings potential is considering each process in the operational sequence. In which processes is logistics involved?

The most important factors in detail:

• Storage costs for the operation and maintenance of a warehouse. This includes energy and personnel costs, equipment and inventory maintenance, and warehouse security expenses or, if applicable, rent. Suppose a company does not operate its own warehouse but has outsourced this logistics area. In that case, the fees charged by a service provider for warehouse logistics or fulfillment services are the decisive factor.
• In the case of a company-owned solution, transportation costs also include all expenses for operating and maintaining the vehicle fleet. In addition to personnel, maintenance, and servicing, fuel and tolls are also relevant here. In the case of a partnership with a transport logistics service provider, the level of freight rates is important.
• Packaging costs
• Administrative costs for order processing
• Costs for strategic tasks: The sole consideration of primary storage and transportation costs still needs to reflect the total costs in logistics. The financial resources required for the planning, organizing, and controlling logistics processes are significant, too. For online retailers, there is also the aspect of returns.

Outsourcing or In-House Logistics?

There is a categorical difference between a company needing more resources and expertise to implement its logistics solutions and cooperating with external service providers. For smaller companies, in-house logistics is generally not an option. This is particularly true for most online retailers, who are therefore dependent on e-commerce logistics service providers.

When it comes to strategies for reducing costs in internal logistics or outsourcing logistics processes, it should be noted that outsourcing itself can be a way of reducing costs. This is the case when an analysis of the financial resources shows that a company is better off hiring a transport or warehouse logistics service provider. Cost savings often happen when fixed costs, such as investments in infrastructure and technology, as well as costs for their operation, are eliminated, and companies only pay for the services actually provided.

However, the decision for or against logistics outsourcing is not only about costs but also about control over the processes or the direct line to the customer. For this reason, this article deals with strategies for reducing the costs of in-house logistics and logistics services.

Cost Reduction for Internal Logistics

If there are good reasons for a company to keep logistics in its own hands, then the key to successful cost reduction lies in the area of inventory and process management. Optimized processes save material, time, and personnel resources and, therefore, money. Warehouse and transport logistics must always be considered together, as the interfaces between the two logistics areas of incoming and outgoing goods must be designed in such a way that the transitions run smoothly.

Despite this overall view, transportation and storage each offer specific approaches to reducing costs.

Lower Costs in Warehouse Logistics

In warehouse logistics, you can optimize processes and save costs through:

• Warehouse logistics controlling based on warehouse KPIs (Key Performance Indicators): Space costs money and the longer certain stocks occupy space, the more expensive it is to store them. KPIs on the inventory turnover rate, throughput times, or storage costs per unit provide information on storage efficiency.
• An efficient and cost-saving warehouse means matching demand and capacity. Goods in high demand must always be in stock; slow-moving items only take up valuable space. Demand analyses, demand forecasts, and coordinated inventory management that harmonizes procurement and distribution are prerequisites for sustainable cost reduction in the warehouse.
• Optimized use of space and automated processes: Intelligent shelving systems and shelving robots enable efficient utilization of spatial capacities; improved walking routes in the warehouse or automated picking speed up processes. Automation initially represents an investment that usually pays for itself quickly through process optimization.
• Modern IT solutions: All of the points mentioned above require one thing: the use of modern technologies. These include the aforementioned robots, which have long been used in modern warehouses, or drones for inventory management and stocktaking—but above all, IT warehouse management systems (WMS). Such systems are not only used for better planning and utilization of capacities or a real-time comparison of physical stock and the stock in the inventory management system but also, for example, facilitate KPI monitoring. Logistics control for cost management and cost control would be impossible without modern IT solutions.

Lower Costs in Transport Logistics

Companies with their own logistics fleet cannot influence the fuel price or the level of road tolls and only have limited power over personnel costs during driver shortages. Skilled workers are scarce and need to be paid accordingly. The vehicles themselves also offer only limited savings potential. They have to be purchased, maintained, or repaired regardless of their technology. The subsidy situation for environmentally friendly drive systems has deteriorated in Germany and other European countries, so vehicles with alternative drive systems offer added ecological value but hardly any financial incentives.

In transport logistics, as in warehousing, optimizing processes to save costs is essential. Two starting points are particularly relevant here:

• Optimized route planning to use vehicles, fuel and personnel as efficiently as possible.

• Intelligent load formation, which makes optimum use of the loading area depending on weight and size and, in conjunction with route planning, also adjusts the load to the sequence of destinations.

As with warehouse logistics, nothing works without IT systems, ideally with the support of artificial intelligence (AI). AI-supported route planning uses traffic and weather data as a basis for calculation and can adapt the route accordingly.

Cost Reduction With Outsourced Logistics

The savings potential here depends on the respective logistics model. Whereas previously we talked about in-house logistics—first-party logistics (1PL)—outsourcing is now available in 2PL to 5PL levels: from simple outsourcing of transportation in second-party logistics to complex fifth-party logistics, where a service provider not only takes over all logistics processes but also offers analyses, consulting or big data services.

The more services a partner provides in addition to transport or storage, such as order picking, fulfillment, or returns management, the more fees are incurred, but these are no longer fixed costs and can potentially be reduced with good negotiations. The market is also constantly changing, so service recipients should continuously monitor providers and their products and obtain comparative offers. Attention is advisable, as differences in individual items can make comparisons difficult.

Typical cost items of logistics service providers are

• Incoming goods
• Warehousing
• Order picking
• Packaging
• Shipping
• Returns

To reduce your freight costs with a 2PL model, you should compare the freight rates of different providers. However, low cost does not necessarily mean long-term cost savings if the delivery quality could be better. In the age of e-commerce, delivery is crucial to the customer experience—saving money in the short term and losing customers in the long term is not a win.