So the bottom line is, logistics/supply chain costs are going to make up a large portion of your total costs. In order to successfully grow your business, you need to have a good understanding of these costs.
We would recommend breaking down supply chain costs into four key categories. Let’s dive into each one:
Transportation
Costs that fall within the transportation category can be classified as any expense associated with the movement of your product or raw materials between locations. A few examples are: inbound raw materials to your manufacturing site, outbound finished goods to your warehouse, and outbound orders to customers. One thing we’d like to highlight is that there are situations where your customer or supplier may be responsible for freight costs. While it’s true you may not necessarily receive an invoice from a carrier for these moves, it’s important to refrain from having the mindset that you don’t incur any transportation expense. It may be factored into your agreements with the supplier or customer, but ultimately you are paying for the freight to move.
Warehousing / Fulfillment
Any cost associated with storing and handling your product will fall in this bucket. Warehousing costs can be broken further down into two primary categories: storage costs and handling costs. Warehouse storage costs would be rent or lease payments for any warehouse space you have purchased to store your products. In many cases, a better option would be to utilize a 3PL to store your products. If you use a 3PL, the storage charges you receive from them would fall into your storage bucket.
As mentioned, the second warehouse cost category to consider is handling. This is going to be the cost associated with actually receiving product and fulfilling orders. The biggest component of this cost will likely be labor, but other items that would fall within this category are: equipment, systems, and supplies. Just as we discussed above, likely a far better option than doing this on your own is working with a 3PL to handle your product. If this is the case for you, the handling charges you receive from them would fall within this bucket.
Inventory
Our next key supply chain cost category is one that can easily be overlooked, and can quickly get companies in trouble if not managed properly. We’re talking about the cost of carrying the inventory of all your wonderful products you’ve created. While it’s understandably exciting to see your new product come to life, and actually sit on a storage shelf, remember that is an expense sitting on your balance sheet until you sell the product. We’ll go into more detail in future articles, but a key metric for you to keep an eye on is inventory turns. If you’re not turning your inventory in an efficient manner, it can be a huge financial drain on your company.
Vendor Compliance
We talked about it in our previous article, but the final supply chain cost category we’re highlighting is vendor compliance. The last article discussed the importance of having a system in place to handle the expectations and requirements of your retail customers. This comes at a cost. The biggest cost typically associated with this category is systems, especially if you are shipping to retailers with more enhanced requirements such as EDI and ASNs. You will likely need to find a partner that can help you manage and execute on these requirements, and again, that comes at a cost. Additionally, if your retail compliance program is lacking, you could face huge costs in the form of chargebacks or fines. These are all avoidable, and again, we’d point you to our last article to learn more.
Let’s recap: logistics/supply chain costs are a huge component of the overall economy, and will undoubtedly be a large expense for your organization. There are four key categories of supply chain costs: transportation, warehousing, inventory, and vendor compliance. Understanding these costs will be critical for your success, and can give you a huge edge against your competition. Ultimately your understanding of these costs will enable you to calculate your total landed cost - we will dive deeper into this in a future article. While breaking down all your supply chain costs can be confusing and complex it will be well worth it in the end.
