A few weeks ago, stemming from my column on “Logistics Costs, Up or Down?,” we launched a small survey to get a pulse on the practices and experiences of SCDigest readers on this subject. I know everyone is surveyed to death, but we had 247 usable responses, which is a pretty good number – thanks for all those who took the time to do so.
It’s always hard to glean real insight from these kinds of things, because (a) they aren’t usually truly random or scientific, which many commentators conveniently forget, and (b) to get at real insight you’d have to have such a long questionnaire to obtain granular detail and/or make the right correlations that it would be hard to get anyone to actually complete it.
So we went for fairly short and sweet, and as always in retrospect I would have asked some slightly different questions after seeing the data, but I think there is still some good information here on logistics costs and practices.
Primary Method of Measuring Logistics Costs
40% of respondents said their primary measure of logistics costs is as a percent of sales. This compares with 25% who said the primary measure was in absolute cost, 16% who said it was cost by some unit of weight (hundred weight, kilograms, etc.), 11% who said it was cost per some unit sold measure (case, unit), and 8% who said they used “activity-based costing” as the primary measure.
As one reader commented: “The mistake of using % of sales as one’s only meaningful metric will become very obvious during the deflationary portion of the cycle. The escalation of absolute costs can hide in the euphoria of top line growth only to surface as a huge swing in % increase when the market and the associated top line falls, even if the absolute cost remains relatively stable. However; all too often as budget conscious managers we are willing to take the win and the associated credit without acknowledging the windfall aspects of the cycle.”
About 25% of respondents indicated through comments that in practice they look at logistics costs multiple ways – we simply asked for the primary measure. Another respondent commented: “We use several of these measures, but exclude items that are out of our control, such as the cost of benefits.” Most companies look at logistics costs from several directions.
What is Included in Logistics Costs?
100% of respondents included warehouse/distribution costs and 98% outbound transportation costs in calculating costs of logistics (a handful said customers paid for all outbound freight).
55% included inbound transportation costs, while 45% did not. 29% included reverse logistics/returns costs, and in somewhat of a surprise to me, only 32% of respondents included inventory carrying costs as part of total logistics costs. 21% included customer service costs, which are generally included when various pundits look at total logistics costs. There was a slight vertical orientation here, with customer service more likely to be included in the consumer packaged goods, food/ beverage, 3PL and chemical segments, and uncommon in retail (as makes sense), wholesale distribution, and tech, to site a few.
Among manufacturers, about one-third said they included “manufacturing logistics costs,” but we did not well define the term. It was meant to include costs into and out of production, as well as material storage and handling costs in the plant. What makes this aspect hard is that it’s hard to know who really is a manufacturer these days – a lot of companies which used to be are now sourcing overseas. But several respondents in comments wanted to make clear that plant transfer costs were included in logistics costs.
Other costs cited that were not in our specific list (just a handful at most each) included: import/export costs, freight audit expense, and packaging costs.
Logistics Costs Up or Down in the Past Year?
The results broke out this way, by the way companies measure logistics costs:
- 74% said logistics costs were up
- 26% said logistics costs were down
As a percent of sales:
- 62% said costs were up
- 38% said costs were down
Logically, this was perhaps the most industry-specific result, as product price is often the key driver of this metric. Virtually 100% of food and beverage and wholesale distributors, for example, said their logistics costs as a percent of sale were higher in 2005. Conversely, a high percentage of respondents in the chemical and the 3PL industries said their costs as a percent of sales declined. The chemicals one makes sense, as prices in general rose heavily in that sector – not sure about 3PLs.
Cost Per Weight or Unit:
- 71% said costs were up
- 29% said costs were down.
Noted one respondent: “How can anyone say logistics costs are going down when the cost of diesel has risen almost $1 a gallon in the past year. The cost of rail has increased 7-10% across the board and the major air carriers have implemented fuel surcharges. There is no way!”
So, I guess that’s the real question, which we don’t have answered, which is how in this environment 25-30% said either total logistics costs or costs per weight/unit were down last year? (Of course, both metrics can also be very volume-driven.)
As usual, we’re out of space. We’ll have more logistics costs survey information, including some industry specific data, and graphs of this data early next week – check www.scdigest.com or subscribe to our RSS feed below to get it as it’s published.
What do you think is the right way to measure logistics costs? Do these results surprise you at all? What elements do you think should be included in logistics cost measures, and why?