Breaking Down Your Logistics Budget

You can’t create a realistic budget if you don’t dive into the details of your logistics costs

Recent statistics show that U.S. companies spent $1.64 trillion for transportation and logistics services in 2018. It was an increase of more than 11% from the previous year, which works out to about 8% of the country’s gross domestic product.

How much companies spend on logistics in relation to our gross domestic product is one way to measure operational efficiency when compared to other countries. Is your logistics spend as cost-efficient as it can be? Here are the three most effective ways to review your budgeting strategy.

In this article, we will discuss how to understand your logistics budget and build a better one, including:

• The top contributors to logistics costs

• How reducing complexity can uncover hidden budget issues

• Why your logistics budget must be a company-wide effort

Top contributors to logistics costs

Generally, costs include administrative expenses, labor, storage and transportation. Logistics — the connective tissue between these areas — varies on the type of goods. Perishables, for example, can drastically change the cost of transportation or storage.

Digging a bit deeper, we see that the biggest contributors to these cost areas are usually:

• Fuel costs

• Unexpected transportation fees because of delayed arrivals

• Problems caused by documentation errors

• Warehousing expenses

Two areas that can give you quick insight into your logistics budget.

1. Get to the bottom of downtime. Trucks idling at a warehouse while they wait for loading generate multiple costs.

2. Manual paperwork. Electronic document imaging (EDI) and other technology-centric solutions do more than save time. Many of these technologies offer access to real-time information that allow your administrative team to make better purchase decisions that result in cost savings.

Reducing logistical complexity

Any opportunity to reduce complexity in these areas can produce savings. Start by examining and identifying what contributes to the journey of your product from start to finish. How much do you know about the processes your vendors have in place? Gain a deep level of understanding of who does what and how along every step.

You’ve likely heard of key performance indicators (KPIs). These are measurable values that show how effectively your organization is achieving key objectives. Supply chain logistics success depends on cross-functional activities, so a single department or vendor may not be solely responsible for performance. Keep this in mind as you choose which numbers indicate logistical efficiency.

Once you’re confident that you’ve identified the measurable aspects of your logistics performance, you’re ready to look at scenarios of what will occur when you gain more efficiency in a specific area.

• What happens if you’re able to reduce fuel costs by moving manufacturing closer to your customers?

• What are the cost savings of streamlining the backend administrative processes?

• How would consolidation of shipments impact warehousing costs?

Keep in mind that the interconnected nature of supply chain logistics means that a positive action in one area might create a negative impact in another. It’s important that you examine the effects from all angles and understand the consequences before settling on a budget

Everyone in your organization can contribute to more efficient budgeting

Breaking down your logistics budget requires understanding where the money is going at a granular level. It’s much easier to accomplish when your entire organization takes ownership of this responsibility. It helps you to move beyond obvious high-level costs. They say the devil is in the details. Often, it’s a hidden sub-component cost that, when multiplied across an operation, adds up to become surprisingly large.

Encourage buy-in and company-wide cooperation by developing organizational incentives. This doesn’t necessarily mean you have to pay people to look for efficiencies, but they do have to be able to see the cause and effect of their efforts.

The most effective way to achieve this transparency is to embrace digital technology for shipping and logistics, and the analytics opportunities it provides. Real-time data reporting and machine learning can drastically improve forecasting by increasing productivity. This can also help you manage expectations. It’s important to know the difference between actual budgeting and setting budget goals.

Your budget is a plan, and it’s only as good as the information you used to make assumptions. Higher levels of confidence based on those assumptions are achieved when you get granular about what contributes to logistics costs. A budget’s objective isn’t always to reduce spending, but it should always be to increase efficiency.

Looking for a partner to help you better understand and interpret the impact of changes to your logistics budget? Learn more about how we can help.