Guide to Logistics Costs: Strategies To Calculate and Reduce
by Jaidyn Farar
Logistics costs are the expenses required to transport goods through the supply chain, from the point of origin to the final destination. These expenses include supplies and equipment, vendor fees, storage space, labor, and more.
Unfortunately, several factors—including warehouse space shortages, labor shortages, and shifting consumer expectations—have caused logistics costs to increase in recent years. But don’t despair! Once you understand exactly what you’re spending on logistics, you can take action to bring those expenses down.
Let’s start at the beginning: what are the most common logistics costs?
Types of logistics costs
First, it’s important to understand the difference between direct and indirect logistics costs.
Direct logistics costs are often the easiest to understand and measure because they’re directly tied to the movement and handling of goods. For example, direct costs include things like fees paid to carriers and the cost of packaging materials.
Indirect logistics costs, on the other hand, are related to overhead or support activities that aren’t directly tied to specific shipments. Examples include staff wages, office supplies, and technology.
Warehousing
Warehousing costs are associated with the physical space used to store inventory, as well as the supplies, labor, and equipment needed to manage that space.
One of the most significant warehousing costs is the monthly rent or mortgage payment for the facility itself. In addition, businesses are responsible for utilities such as electricity, heating, and water. On top of that, you’ll need to pay for insurance and security systems to protect the warehouse against risks.
Warehouses, fulfillment centers, and distribution centers require specialized storage systems and equipment to function effectively. When calculating logistics costs, it’s important to factor in the cost of shelves, bins, racks, and pallets, as well as forklifts, conveyors, and automation technology.
Inventory management
Inventory management costs can include storage fees for warehousing goods, costs associated with inventory tracking systems, insurance to protect stock, labor for handling and organizing products, and losses from damaged or obsolete inventory. There are also costs associated with maintaining optimal stock levels to avoid overstocking or stockouts.
Transportation
Transportation costs are related to shipping goods in bulk to your fulfillment centers (inbound logistics) and shipping products to individual customers (outbound logistics). These expenses often make up the largest portion of direct logistics costs.
Inbound transportation costs
Inbound transportation costs are expenses incurred when receiving goods or raw materials from suppliers. One key cost is freight charges, which include fees paid to carriers for transporting goods by truck, air, rail, or sea. These costs depend on distance, mode of transport, fuel prices, and the size or weight of the shipment.
Handling costs also play a role, as you’ll need to unload and move goods from the delivery vehicle into the warehouse, which often requires labor and specialized equipment.
Outbound transportation costs
Outbound transportation is the shipment of finished goods to customers or distribution centers. One of the largest outbound transportation costs is shipping fees paid to carriers, especially for ecommerce businesses that offer fast or free shipping. Returns and reverse logistics also add to costs, especially if your company offers free return shipping.
Order processing
One of the most time-consuming parts of order processing is locating items in the warehouse, packaging them, and shipping them out. While some businesses use automation technology to accomplish this, most still rely (at least partially) on employees to pick, pack, and prepare items for shipment. The associated costs include wages, benefits, and training expenses.
The cost of packaging materials, such as boxes, bubble wrap, labels, and packing tape, should also be considered. Packaging generally needs to be high-quality to protect the product during transit, and businesses may also invest in branded packaging, which adds an extra layer of cost. If you ship products that require specialized packaging, such as fragile or oversized items, packaging expenses will be even higher.
Administrative
Administrative logistics costs are the overhead expenses required to manage and support logistics operations. While these costs don’t directly involve the physical movement of goods, they are critical for maintaining efficient logistics operations and supporting the overall supply chain.
These costs include salaries and benefits for managers, coordinators, and customer service teams. The costs associated with hiring, training, and retaining employees also fall under the administrative umbrella.
Additional administrative costs include customer service operations for handling inquiries and returns, as well as financial management for tracking and reporting logistics expenses.
Why is it important to measure and track logistics costs?
According to a McKinsey analysis, logistics costs represent between 12% and 20% of ecommerce revenues. Because decisions about transportation, inventory management, and more have such a significant financial impact on the business, it’s important to get them right.
Measuring your logistics costs can seem overwhelming, but it’s essential for a well-organized, efficient business. The reason is simple: the first step to lowering costs is knowing exactly where your money is going. Tracking logistics costs will allow you to make better business decisions, improve budgeting and forecasting, and cut unnecessary expenses.
How do I measure logistics costs?
Businesses can start measuring logistics costs by following the steps below.
- Define key performance indicators (KPIs). Begin by choosing relevant KPIs that align with your business goals. For example, you might focus on tracking cost per order, transportation costs as a percentage of sales, or inventory carrying costs.
- Choose a time frame to measure. Ideally, you should track logistics costs on a monthly, quarterly, and yearly basis.
- Collect data. Gather information from every department involved in logistics—procurement, warehousing, transportation, and customer service.
- Calculate direct and indirect costs. Now it’s time to add up your direct and indirect expenses. List the exact cost of each expense by category (e.g., transportation, warehousing, inventory management), and then sum them up to get a clear picture of total logistics costs.
- Analyze the data. Use the collected data to calculate the KPIs. For example, to find cost per order, you’ll divide the total logistics costs by the number of orders processed in the chosen time frame.
- Establish benchmarks. By comparing your results to industry standards or past performance, you’ll be able to identify areas for improvement and set realistic goals for reducing logistics costs.
Finally, take action to reduce costs where necessary (read on for seven ideas).
7 strategies to reduce logistics costs
These strategies will help you improve efficiency and decrease costs.
Learn more by listening to our podcast: How To Decrease Cost to Serve With Tom Butt
1. Optimize sourcing and inventory distribution
The locations of your suppliers and fulfillment centers have a major impact on transportation costs.
By sourcing from suppliers that are located close to your business, you can lower inbound shipping costs, including carrier fees and fuel surcharges. Shorter distances also lower the risk of delays, which can help minimize costs associated with inventory holding and stockouts.
Distributing inventory efficiently also saves money in the long run. When products are strategically located close to customers, businesses use warehouse space more effectively. Inventory distribution can also drastically reduce last-mile delivery expenses, as products don’t need to travel as far to reach customers.
2. Consolidate shipments and orders
Consolidating shipments and orders lets you take advantage of economies of scale and reduce the amount you’re paying to shipping carriers.
When consolidating shipments, businesses combine multiple smaller shipments into a single, larger one, which can lower transportation expenses through bulk shipping rates and fewer trips. This is especially useful when shipping internationally, as it streamlines customs clearance.
For ecommerce brands, order consolidation is the way to go. If the same customer orders multiple items, fulfillment staff (with the help of an order management system) can ensure that those products are shipped in one package rather than several packages. This minimizes packaging costs and the number of shipments required.
3. Negotiate with carriers for better rates
Negotiating with shipping carriers can significantly reduce logistics costs by allowing you to secure better rates and more favorable terms. By building strong relationships with carriers and leveraging shipping volume, you can negotiate lower prices for both inbound and outbound shipments.
And we’re not just talking about lower base shipping rates—you may also be able to negotiate for added benefits like flexible delivery options, reduced fuel surcharges, or waived accessorial fees.
To ensure you’re getting the best possible deal on shipping, regularly review contracts and compare rates from multiple carriers.
4. Improve inventory management
Good inventory management reduces both stockouts and overstocking, keeping costs in check. The key is achieving full inventory visibility, which can be done with the help of technology. Understanding which products sell best, which aren’t selling well, and which often sell together helps merchants make more strategic decisions about inventory.
5. Increase load efficiency
When it comes to transportation, wasted space equals wasted money. Load planning solves both issues, leading to fewer trips and lower fuel, labor, and vehicle maintenance expenses.
Businesses can optimize loads, palletization, and packaging using software like MagicLogic, ensuring goods are packed and shipped in a way that uses the full capacity of trucks or containers.
6. Regularly train employees
When employees receive regular training in processes and technology, they perform better and make fewer costly mistakes. For example, well-trained staff are more proficient in inventory management techniques, which can prevent mistakes such as overstocking, mispicks, or shipping delays. Similarly, training in warehouse equipment handling improves safety and reduces accidents or damage to goods, lowering both repair and replacement costs.
7. Implement the right technology
While logistics technology comes with a cost, the best systems will save your business much more in the long run by streamlining operations, enhancing visibility, and improving decision-making across the supply chain.
For example, warehouse management systems (WMS) allow businesses to optimize inventory tracking, automate order processing, and reduce picking errors, leading to faster fulfillment and lower labor costs. Shipping platforms make it easy to integrate with shipping carriers, choose the cheapest shipping methods, and generate shipping labels almost instantly. And using data analytics tools makes it easy to analyze performance metrics, forecast demand, and identify cost-saving opportunities.
Reduce logistics costs with EasyPost Enterprise
Finding the best logistics systems for your organization is key to cutting costs. EasyPost Enterprise provides solutions that save large enterprises time and money. For example, subscription box service FabFitFun has saved millions of dollars per quarter by optimizing packaging with MagicLogic and rate-shopping with EasyPost Enterprise.
Talk to a logistics expert to learn which EasyPost Enterprise solution is right for you.