April 6th, 2022
How to Calculate Transportation Costs in Logistics
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Understanding your logistics cost model is critical for long-term business success
Transport costs are one among several other costs (service, inventory, and warehouse) that influence the total landed cost of operating a logistics enterprise. Compared to the others, transport expenditure is often the most important. Thus, keeping it low while maintaining high product/service performance is essential to the profitability of your business.
But before that, you first have to know how much of your budget transport takes. You should also know what elements it entails and with supply chain inflation at a 3-year high in the UK currently, here we take a closer look at transportation costs in logistics and how to calculate them.
Calculating your transportation costs
Determining your transport costs is part of the larger transportation analysis and keeping supply chain costs low can make or break your firm’s viability. This analysis involves determining your transport, service, inventory, and warehouse costs and measuring them against your total revenue. It’s an excellent way to visualise what proportion of their revenue a business spends on logistics and whether or not it’s sustainable.
Calculating the total sales revenue
Revenue refers to the total value of the sales you’ve made within a given period. It’s pretty easy to calculate, actually; just look at your books and add the values of all the sales you’ve made. However, before you factor in the logistical costs, you need to subtract the material, labour, utilities, and other production costs.
You now want to look at your transportation-level supply chain costs. These can be quite varied since they are influenced by many other factors, like distance, cost of fuel, seasons, speed, and the weight and density of materials. We’ll take a closer look at these factors below, and on a more granular UK-level here.
Now, you want to determine all your transportation level costs. Look at how much you paid for drivers, fuel, special licenses, purchasing/leasing vehicles, outsourced work, and any other process related to transportation. Add all these together to get the total cost of transportation.
How do you tell whether you’re spending too much on transport?
Businesses vary. They are not of the same size, nor do they have the same level of expenditure. Thus, no particular amount, like 1,000, 10,000, or 100,000, is considered the threshold of logistics spending. This is why it’s important to measure your transport costs and all other logistic costs against the revenue.
For instance, if you’re spending 10,000 on transport and bringing in 100,000 in sales revenue, then your transport costs account for 10% of your revenue.
Considering that transport is usually the most expensive logistics cost, 10% isn’t necessarily bad.
Factors affecting transportation costs
Are you satisfied with how your logistics costs look? If not, you probably want to reduce them. This process begins by identifying factors affecting freight rates and tweaking those that can be changed. That said, here are the factors with the biggest impact on transportation costs in logistics.
Flexibility and speed
Flexibility and speed has always affected transportation costs. However, its impact has increased significantly since the arrival of the pandemic. Same-day and overnight deliveries are now a big part of logistics. So, if you’re experiencing high logistics costs, it may be that your routes aren’t fully optimised, and there is a lot of idle time.
The transport cost is directly proportional to the distance between the fulfilment centre (original pick-up point) and the final destination. The longer the distance, the higher the cost. Fortunately, there are several ways to reduce the cost due to distance. These include;
- Reducing the number of deliveries or outsourcing logistics services to outlying areas
- Adding more fulfilment centres to areas receiving the most deliveries to reduce the last mile delivery costs
- Delivering only when trucks are at full capacity, especially when transporting product over long distances.
Weight, volume, and density of shipments
The bigger the weight and density of your shipments, the higher the freight costs. The volume, i.e., how much space your product occupies, also affects your transportation costs. Generally, changing the weight of your product isn’t easy. But what you can change is your packaging.
You want to use high-quality, low-weight packaging. You can also reduce the volume by removing unnecessary items included in the packaging. These allow for improved efficiency and better freight rates if you’re outsourcing.
Fuel affects transportation costs. Unfortunately, you have virtually no control over these and with UK fuels prices at an all-time record high despite the recent 5p duty cut, this is an incredibly pressing issue for budget managers. However, you can reduce your fuel consumption by doing what we outlined above.
For instance, reducing the size of your packaging allows you to transport more items in a single trip, reducing the total number of trips you have to make to move a certain amount of goods. Fewer trips equal less fuel consumption, hence reduced transport costs.
Seasonal demand affects businesses that outsource their transport services. During peak demand, operators charge higher, and when the demand is low, they charge lower and may even offer discounts. The best way to deal with high transportation costs due to seasonal demand is to improve your forecasting and establish good relationships with your freight provider.
Note: While calculating the cost of transport, you might as well check other logistical costs such as customs clearance or import duties and the cost per unit freight cost at the time of calculation for more accurate data. Treat them the same way you did your transport costs, i.e., see how much of your revenue they consume.
This handy transport cost calculator is a very handy resource across sea freight, air freight, truck transport, train transport and various additional costs you’ll need to factoring into the overall cost of logistics.
Other types of costs
Service level costs
The service level refers to the expectations of your customers. Thus, service level costs arise when trying to meet these expectations. For instance, your customer may require a two-day turnaround between the order date and the date you deliver. The service level costs will be how much it costs you to process and deliver their order and the expedited shipping costs of meeting such a commitment within those two days.
Generally, you want to find a good balance between meeting your customers’ demands and safeguarding your profitability. To do this, ask yourself whether the customer brings in enough revenue to justify spending to meet their service level expectations.
As John Oliver put it this week in his ‘Last Week Tonight’ series, ‘someone, somewhere pays the price‘ to fulfil ever-increasing demand within the logistics sector.
The most common inventory cost comes from storage, which in this case, can be rented or owned. If you own the storage space, you need to account for the maintenance costs, utilities and labour costs. And if you’re renting, it will only be the cost of renting the space.
Overall, inventory costs vary depending on the goods being stored. Some goods require special facilities, like refrigeration, which will cost more regardless of renting or not. And if you produce your own product, inventory costs will also include the amount you spend on the storage of raw materials and the final product.
Last, but by no means least, if you’re transporting goods by road, air or sea, you should consider purchasing insurance. This will protect you against any accidents that occur during transit. It will also help you cover any damage caused to the cargo itself.
Final take on Logistics Costs
Calculating your transportation expenses will have you examining your entire supply chain, revenue, and operational costs. It’s a good first step toward recognising unnecessary costs and eliminating them in order to reduce your logistics and overall operating costs.
If you’d like support or assistance in your logistics management efforts, please contact us today and we’d be more than happy to help. With a wealth of experience in supporting British businesses across 3PL and a whole host of logistics industries, we know a thing or two about cost-saving and getting the best possible bang for buck in relation to our service-level areas of expertise.