Mistakes to avoid when looking to reduce logistics costs
So far in my series of posts on procurement and logistics trends, we’ve covered accurate demand planning and globalisation. In this post, I will talk about the third trend: pricing pressures and cost-saving strategies.
There is no sign of relief as fuel prices continue to rise. In the logistics arena, fuel costs are a primary driver of price and a key focus when companies need to find ways to manage expenses. Many organisations make the mistake of assuming that the best way to manage costs is to reduce their logistics expenses. While it’s true that logistics costs can be high, organisations incorrectly assume there’s fat built into logistics, when the true expense actually lies in fuel surcharges that are beyond anyone’s control. It’s expensive to move product across borders, with the location of a vendor’s manufacturing plant playing a major part. For example, it might be unusually expensive to ship products in and out of a particular country, due to the frequency of flights to and from its airports. It’s difficult to monitor and control costs and factors such as these contribute to increased costs of global logistics, which is simply passed on to the end-user organisations.
But it is not all bad news. There are some countermeasures organisations can take to minimise logistics costs, such as order consolidation, multimodal transport, sea freight versus air freight, and so forth. The best cost-saving strategy, however, would be to outsource all procurement and logistics to a supply chain service provider that has sufficient expertise and experience in international logistics and know exactly how and where to save. Attempting to handle logistics in-house without the proper expertise often leads to higher costs because it’s not part of the organisation’s core focus. All too often, organisations who attempt to handle logistics on their own run into a host of problems, calling in the experts at the last minute at a far higher cost than if they’d simply outsourced the process from the start.
In addition to fuel costs, import duties and taxes are other areas where organisations can save by ensuring they’re not overcharged by customs and that goods are cleared in the most cost-efficient way. Goods should be tariffed and classified correctly on the commercial invoice to ensure that there are no unnecessary costs or misdeclaration of duties or tariffs. This process can save a great amount on large-scale imports, provided the procurement and logistics partner has an understanding of the product and its environment. Again, if this expertise doesn’t fall within the end-user organisation’s core focus, it’s best to leave such negotiations to an expert supply chain logistics partner.
Problems with the cost of logistics usually become glaringly obvious at the destination, when a product has been ordered, shipped from the plant, and arrived at the destination country without the correct paperwork, because it hadn’t been processed correctly at the origin. Parts of the order may be incorrectly labelled or even missing altogether. In these cases, it may be necessary to ship everything back to the origin and re-start the process from scratch, often at double the cost. Most, if not all, of these problems can be avoided by engaging an appropriate procurement and logistics partner.
While it’s critical to engage a knowledgeable partner, it’s also important to note that the intense competition among system integrators who provide supply chain services sometimes results in logistics costs being hidden in other areas, such as margin or maintenance charges. It’s best to partner with a systems integrator that’s completely transparent as far as logistics costs are concerned, expressing these charges separately and clearly as a percentage of the value of the equipment.
I hope this post has shed some light on how to reduce logistics costs. Watch out for my next post where I delve into more detail about outsourcing, and after that we look at trend number five which is all about shortened and more complex product life cycles.