Recent assessments suggest that the cost of transporting a container of goods has increased by up to 17%, and there has never been more demand for warehouse space, with the UK, Singapore and the Netherlands – key logistics hubs – reporting above 95% occupancy rates. When logistics costs are increasing, cost-optimisation can change a business’s profit ratio substantially for the better.
It’s important to bear in mind that cost optimisation is not the same as cost reduction. Merely cutting costs or saving money doesn’t necessarily benefit an organisation – in fact blanket cost cuts can slow organisational growth. Additionally, cost cuts that don’t change organisational behaviour can creep back in when managers take their eyes off those specific areas. Cost optimisation, on the other hand, looks for the best option that balances cost with performance to ensure business growth and potentially improve profit margin.
Where to begin with logistics cost-optimisation
1. Optimise warehouse space
There’s a cost to storing inventory (and a cost to storing the supplies and consumables a business uses, which often gets ignored), so the better use you make of your warehousing, the more use you’re making of your investment in that space. Pallet storage is becoming increasingly popular with those who are trying to maximise the value they get from warehousing but it’s not the only route. We’ve written more than a few blogs about how to reorganise inventory to make it more efficient, but extending your thinking to examining how you can organise inventory to make more profit can be an excellent way to achieve better fulfilment and have higher margins.
2. Look at logistics expenses
Efficiency requires managing and controlling supply chain costs so that an organisation gets the best return whilst still securing steady supplies. For most companies, this means making trade offs – the so-called Amazon effect has all been about the speed and constant availability of goods offered through that e-commerce giant. However, the desire to replicate the Amazon effect fails to recognise the costs incurred in creating the Amazon model, which would generally be way beyond most companies. One way to look differently at expenses is to examine the total cost of processes rather than looking merely at lowest supply chain costs – it allows for consideration of factors other than price, such as reliability and quality of goods. This gives companies a chance to optimise their operation, rather than merely lowering cost, which can often lead to a lowered profit margin.
3. Track what matters
There can be no greater contribution to cost optimisation than key performance indicators (KPIs). Sadly, they are lacking in many warehouse operations. Most companies look at inventory turnover, but many neglect inventory to sales ratio, days on hand and cash to cash cycle time. Similarly while many companies explore their order picking accuracy, they may not be looking at back order processing or time from inventory arrival to pick location. As with any KPI, this information is only valuable if it is used to move the company towards its goals and to setting realistic and achievable targets.
4 Focus on the customer when considering warehousing
Whatever metrics a company chooses to use, the ultimate purpose of warehousing activity is to meet the needs of customers – whether they are an internal market, such as exists for a depot that supplies paint or furniture to retail bases across a territory, or an external market such as a retailer using e-commerce channels to sell internationally online. By exploring the supply chain’s structure and strategy, customer needs can be prioritised. For the former kind of warehousing space, this might be offering early delivery for those internal customers who get their orders to the warehouse before a certain deadline. For the latter, it’s more likely to be finding incentives like unlimited free shipping in return for an annual or monthly subscription or next day delivery for orders over a certain cost. This gives customers more choice, and more ways of being satisfied not just with goods, but also with the service provision they receive. This reduces complains which means you’ve cost-optimised your supply chain but reducing a cost centre – complaints – that can be a drain on resources.
5 Move from customer demand to customer demand planning
The next step in cost optimising logistics is to start using customer demand planing to improve your warehousing. Information like order history, known seasonality and market analysis can be used to create a strong demand planning scenario. This has two purposes
a – it allows an organisation to reduce logistics charges by predicting surges (and lows), budgeting for them effectively and putting in place the necessary systems from temporary staff to ordering extra packing material that could otherwise lead to excess expenditure and panic buying of logistics support
b – knowing demand points (high purchasing periods, crunch times in the warehouse etc) allows a company to share this information up and downstream, which means suppliers are prepared and customers are primed to either pay for premium delivery or to accept longer delivery periods.
6 Share information with suppliers
For many organisations, this will be an unexpected cost optimisation strategy, but there’s good evidence that giving demand information to your suppliers allows them to create better demand planning at their end, which means you can receive back better information from them. For a warehouse operation this may be sharing information like planned holidays or local roadworks for companies with internal customers, so they can pre-order or increase order amounts to cover potential disruptions. For companies using ecommerce channels, it is more likely to be order forecasting with timeframes that predict order dates. This allows suppliers to inform you about their own lead times and gives them a chance to be carrying enough inventory to supply your company in good time.