logistics-costs

How much logistics costs you?

In the 1990s, Michael E. Porter introduced the concept of the Value Chain. However, in many organizations, stakeholders still analyze only logistics costs, but not the value that the supply chain creates.

I will write at another time about why it is a mistake and how much it costs companies to think about logistics only in terms of expenses. But now let’s talk about what is of direct interest to everyone – money.

When you plan the budget in your company, you indeed think about it:

  • How to include logistic the costs in detail?
  • What influence do logistics costs have on the financial result?
  • What values should you take as a benchmark in your industry?

In the article, I’m presenting an analysis of logistics costs in several different sectors. I discuss data compiled by the Tompkins Institute, which I have at my disposal, courtesy of Steven Simonson.

Tompkins International is a supply chain solutions company founded in 1975 in the USA. It currently operates in three areas: consulting, materials handling equipment and robotics.

The reviewed data comes from 7 industries and several hundred companies of varying sizes. Therefore, to make the logistics costs comparable, the article presents them as a percentage of company turnover.

WHAT EXACTLY ARE LOGISTICS COSTS?

Practically, as someone responsible for Supply Chain in a large organization, I think you need to consider at least three main groups of expenses when planning a logistics budget.

First, the costs of operating a warehouse, distribution center or fulfillment center. That includes the costs of receiving deliveries and handling and shipping customer orders.

Secondly, transportation costs, which depend on the industry and the organization’s strategy. However, in all cases will include the cost of maintaining your fleet or transportation services.

Finally, overhead costs, which consist mainly of salaries of a team of specialists and managers in the logistics team. In addition, the cost of maintaining systems without which today’s logistics simply does not function.

If you are interested in what kind of IT systems I have in mind, I recommend an earlier article – How to choose a system supporting Supply Chain?

Notice: Some organizations adopt the convention of planning and reporting the cost of supply chain support systems within the IT budget. I have not found this approach to be beneficial.

Of course, the above breakdown is a simplification. It does not cover all the costs of operating the entire supply chain. We should also include, for example, the cost of maintaining inventory.

I will write perhaps another time about determining the financial costs associated with the freezing of capital in finished products and materials.

In this article, I will discuss only the direct costs of logistics.

A STRUCTURE OF THE WAREHOUSE COSTS

The operating costs of a warehouse, a distribution center or, more broadly, a logistics center comprise the fees of the workforce, maintenance of the facility itself, depreciation of equipment, and the costs of its operation.

According to the data collected by Tompkins Institute, the largest category of expenses in logistic centers is workforce costs. They constitute as much as 61% of all operating expenses. That is practically 2,5 times more than building maintenance costs.

The relation between labor costs and the remaining costs of warehouse operations obviously depends on the location. The illustrative values presented below have been averaged between North America and Europe.

Nevertheless, based on my experience, the order of magnitude presented in the chart is a reasonable reference point.

cost types in distribution center
Source: Own work based on Tompkins Institute studies

In the companies I have looked at, warehouse labor costs, wages and salaries always accounted for between 50% and 70% of all reported costs.

The next largest category, building maintenance costs, includes rent or space lease, electricity, water, waste disposal, and sewage management fees.

According to the available data, all these expenses are just about 25% of the total labor costs of the logistics center.

Then there are smaller cost categories such as maintenance of machinery (about 4%), mobile equipment (about 2%) or several other minor cost groups (up to 8% in total).

Knowing the cost structure of your warehouse (or warehouses in the case of larger organizations), you can start to wonder: how much should it all cost together?

In other words, what percentage of the company’s turnover can be represented by the costs of warehouse operations alone?

HOW TO READ THE FOLLOWING CHARTS?

Before I answer this question, there is some information about data presentation. Interpreting the rest of the article will be easier if you take a moment to read the section below.

All other charts in the article present costs as a percentage of sales per year. For shorter periods, the results may be different from those presented, depending on the seasonality of sales in your business.

I constructed the charts as box plots. You can find more about this kind of graph on Wikipedia – Box plot.

On the charts, you will find four pieces of information:

  • Minimum – the lowest cost level declared by the surveyed companies (shown as a whisker on the left)
  • First quartile – the level below which 1/4 of the surveyed companies declare their costs (represented by the beginning of the darker rectangle)
  • Median – the level below and above which half of the companies define their costs (depicted as the junction of the darker and lighter rectangle)
  • Third quartile – level below which 3/4 of surveyed companies declare their costs (represented by the end of the lighter rectangle)

However, you will not find the maximum recorded among the surveyed companies’ logistics costs.

It was not made available by Tompkins Institute and I did not ask. The highest costs do not add anything to work on logistics. It is not an art to spend more or work on a bigger budget.

It would help if you constantly compare yourself only to the best. In this case, to the lowest values.

A LEVEL OF THE WAREHOUSE COSTS

Answering the question posed earlier – the costs of intra-warehouse operations usually account for up to half of the cost of all logistics.

However, the level of expenses for operating a logistics center varies significantly, either in different industries or within one sector.

In the sample of companies surveyed, Home Products, Health & Beuty, and Food & Beverage had the highest costs relative to sales.

These were also the sectors with the most significant cost dispersion among the individual companies surveyed. In the Home Products sector, the difference between the first and third quartile was nearly 9.4%.

This situation is the nature of the products handled, like weight, size, special storage conditions. All this increases the cost of storage, handling, and shipping.

A packet of water, sugar, or a carton that contains several 500ml shampoos. All this handled on pallets takes up much more space than, for example, clothes or electronics.

distribution center costs
Source: Own work based on Tompkins Institute studies

High logistics process costs also occur for products that require refrigeration or freezing. Therefore, companies producing or trading in fresh food also have a relatively high level of logistics operations costs.

In contrast, companies in the Electronics & Electricals and Apparel & Accessories sectors show the lowest costs in relation to sales.

Again, this is due to the physical characteristics of the assortment served. In these sectors, the price of a single product item, and consequently the sales value, is relatively high.

In contrast, costs in relation to sales value are automatically lower. Of course, this does not mean that costs in absolute terms are also lower than in other industries.

A smartphone can have the exact cost of receiving, storing and shipping as an eyeliner. Just its logistical handling in relation to its selling price represents a relatively smaller value.

TRANSPORT COSTS

The next largest group of logistics costs in many types of business are transportation expenses. In some companies, they account for up to three-quarters of logistics costs.

Usually, these are expenses connected with the delivery of orders to the customer. In some cases, they also include costs of collection of raw materials or packaging and possible related customs fees.

If you are interested in Incoterms billing methods, check the infographic saved on our Pinterest.

Let’s return to overall transportation costs in relation to an organization’s sales value. Among the companies surveyed, companies in the Food & Beverage industry had the highest transportation costs relative to turnover.

The second sector where transport costs accounted for a significant percentage was Retail and the third-highest was the Apparel & Accessories manufacturers segment.

transport costs
Source: Own work based on Tompkins Institute studies

Again, Food & Beverages companies also had the most significant spread between the first (1.6%) and third quartiles (10.0%) of the costs in question.

In this case, you should pay attention that variation depends on the geographic distribution of an organization’s customers and suppliers. Longer distance delivery involves higher costs.

It is possible to prepare for this. It would help if you simply incorporated rising transportation costs into your strategy. Among other things, I wrote about this earlier in the article 6 things CEO should know about Supply Chain.

If we build the supply chain in a forward-looking way, we can also prepare the transportation in advance.

We will not discuss the distribution cost of other logistics. The overheads are several times less than logistics centers’ transport and operating costs. Let’s look at the total expenses of logistics.

SO HOW MUCH REALLY DOES LOGISTICS COSTS?

When we sum up both previously discussed logistics costs, we get the perspective visible in the chart below.

It seems that, in the reviewed sample of companies, the Food & Beverages sector has the highest total costs in relation to turnover value, the Electronics & Electricals sector comes in second and companies in the Retail area remain in third place.

Of course, these results should be viewed purely as a reference. In every company, the level of costs depends on several factors.

Without carrying out a detailed audit, it is impossible to determine whether expenses in a given organization should be optimized or not. Or maybe the company would benefit from investing in the development of logistics and supply chain functions.

overall supply chain costs
Source: Own work based on Tompkins Institute studies

However, you can start asking yourself questions about your company’s strategy. Compare yourself or your competitors to the extent of your costs.

Suppose you are wondering how to get information about the level of logistics costs of your competitors. In that case, I suggest you follow the recruitment announcements, which appear on Linked In or other portals.

You can learn a lot by analyzing commonly available data and comparing information from different sources.

For example, last year, Primark was looking for a Logistics Director. The job description listed “managing a budget of ~£250m per annum” and “end-to-end logistics” responsibility.

Primark Logistics Costs
Source: Linked In & Wikipedia

Primark is an Irish retail company with ~400 outlets in Europe. In August 2020, Primark opened its first store in Poland. According to the information posted on Wikipedia, it achieved sales of £5.9 billion in the same year.

Thus, comparing the budget shown in the ad with the level of achieved turnover, we can easily deduce that Primark worked on the level of 4.2% of logistics costs over sales.

FINALLY WHAT ABOUT ECOMMERCE?

You may be wondering why I’m not entirely referring to logistics in eCommerce in this article.

The reason is prosaic. The data made available by Tompkins Institute does not cover this sector. So I can only say, based on my experience, that eCommerce logistics can be significantly more expensive.

Let’s look at the publicly available example of Zalando. According to the company’s 2019 Investors Factbook, logistics costs for this eCommerce leader were between 23% and 28% of turnover.

They have risen further in the subsequent years. Admittedly, in subsequent editions of the Investors Factbook, Zalando does not explicitly state logistics costs relative to turnover.

Zalando 2019 Investors Factbook
Source: Zalando 2019 Investors Factbook. Access: January 2020

Nevertheless, based on the annual reports that Zalando, as a listed company, is obliged to publish, it can be calculated that in 2019 their logistics costs reached 35% in relation to sales…

Considering the current trends, I think this is not the highest level that we will observe in a company that is not a logistics operator. Nevertheless, I hope that further increases will be better planned.

I also hope that the perspective provided will be helpful to you in managing logistics in your organization. If you need more, remember that you can turn to me. The easiest way is through my profile on Linked In or the form under the Contact Us tab.

I also encourage you to sign up for my newsletter. You will always be up to date with the knowledge you need in Supply Chain and Logistics management. You’ll also receive a supplement to this article: the tables on which the charts were built and some otherwise unavailable material.

1 Comment

Leave a Reply

Your email address will not be published.