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  March 10 , 2006 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

The Right Way to Measure Logistics Costs?

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:

Absolute 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?

Let us know your thoughts.

Dan Gilmore


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Quote of the Week

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The other pillar is that people are not stupid.”

Dr. Eli Goldratt, author of "The Goal," from a recent interview with Supply Chain Digest.

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Wal-Mart RFID Out-of-Stock Study - Reader Feedback Summary

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March 7 , 2006

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SCDigest Technology Editor Mark Fralick's Audio Review of RFID World 2006

What new products caught his eye? Listen now.



Q.  What percent of imported food shipments into the U.S. are actually inspected?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're again catching up a bit here. Our piece on the ports leasing controversy, which suggested that despite all the wrong information might in the end usefully serve to highlight real port security issues and low productivity, generated a few responses. This includes our feedback of the week from Harry A. Paulison, who offers a thoughtful perspective on the issue, which rightly or wrongly now appears resolved with Dubai Ports World decided to not operate U.S. terminals directly.  A handful of letters on other topics is also included.

You'll find a summary of letters on our review of the University of Arkansas study of the impact of RFID on out-of-stocks at Wal-Mart in the News and Views section above. A few readers said they would like to see the letters all in one place, so we obliged - almost two dozen of the best feedback we received.

Note we are putting links whenever possible to the original article either in this area or the feedback itself.


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - on the ports controversy:

Once again we have bureaucrats barking out and the tail wagging the dog, making political hey over the wrong end of the issue.  Misinformed comments by politicians, most looking for 15 minutes of fame with voters, feed the misrepresentation of the issue by the media where most headlines read DP World is taking over 6 major US ports, some even say “security” (none of which is true).  This is just another attempt to campaign and try the issue in the court of public opinion.  Most voters aren’t even clear about this issue and know nothing other than what they see on local news programming which perpetuates the falsehoods.

Clarification:  DP World, regardless of its ownership, is buying the British owned company currently holding contracts to operate terminals within the ports.  They are not buying the ports!  Security is and has been the responsibility of the Coast Guard, US Customs and more recently the Department of Homeland Security, all of which are woefully under funded.

Based on comments by politicians on both sides of the aisle, since the issue has become more public, and considering the existing level of foreign management of terminals within US ports, which is information anyone can get, it is clear these politicians and the administration is asleep at the wheel.  Why would any informed voter consider these politicians or the media credible at this point?

Those within the shipping industry are baffled about this response and outcry.  If lawmakers really wanted to address this issue they could have when the issue really became public late last year when DP was in a bidding war for P & O with another terminal operator from Singapore. 

As your article points out, the sad part is that important issues that make situations like this possible go unnoticed, like the inability of US companies to successfully bid for such management, but can’t because the playing field is not level from a tax cost perspective.  The administration and congress should have addressed issues like these years ago or shortly after the tragedies of 9/11 took place.  All of this is too little, too late and does send the wrong message to foreign investors.  Politicians must stop vying for power and focus on the real issues at hand or we will all be in a world of trouble.

I consider myself to be a more informed voter than most and I am not sure if this is deal is good or bad.  I am a registered republican and support Bush on many issues, but I am fed up with the entire system, like many voters, because no practical effort appears to be put forth, only study and rhetoric around the issues and many miss the point.  Here is another one for the books.

Harry A. Paulison

Demarest, NJ

More on the ports controversy:

There is tactical information available to port administrators re shipping schedules and destinations that would be useful to terrorists.

The excuse that the port administrators do not perform security functions is a lame argument.  Beside why should a foreign entity run a US Port?  We don't have the talent?

Pee Gee


On the best location for one distribution center (trivia question):

As usual, your periodical provides top notch information and a seasoned perspective on our "space."  I find this week's Supply Chain Trivia answer surprising, however.  I seem to recall that Terre Haute, IN was, at one time, the population centroid of the nation.  This may have been as long as 30-40 years ago.  I believe that was the motivation for Columbia Record Club locating there.  (Am I dating myself sufficiently?) With the southward and westward migrations we have seen in intervening years, you would think the centroid would similarly move in a southwesterly direction, down I-70 toward St. Louis.  Perhaps it's the "total lead time" criteria combined with the interstate network peculiarities which caused the southeasterly movement.  Keep up the great work!

Dean M. Starovasnik

Solution Development Manager

Peach State Integrated Technologies


On Warehouse Management TCO Calculator:

Your template for Warehouse Management System Total Cost of Ownership Calculator is excellent. As a former software industry manager and now consultant, I can tell you that a proper TCO is often not performed because there are vested interests in it not being done well. Why? Because generally it unearths costs which screw up the cost justification that weren’t being considered.

I agree with you that it is very important to look at each vendor and their proposals in this light, as their can be big differences between them in terms of TCO. This applies to all software categories, not just WMS.

Name withheld by request

Large consulting organization

On Wal-Mart RFID Study:

As a shopper at Wal-Mart and a 30 veteran of distribution management, I have
some questions on the RFID/out-of-stock study.

How does Wal-Mart add back the sale of the competitive product against the
lost sale of the OOS product? My own experience at Wal-Mart is OFTEN having
to pick something else because the major brand is the OOS item, and the
Wal-Mart clone is on the shelf.

Secondly, only "missed" scans at the register, using current technology, vs.
RFID "missing none" would impact the qty. on hand numbers, hence impacting
the predictive OOS flag on their purchasing system. Is it possible that
missed scans could justify RFID costs?? You would think lower labor costs
at both receiving and at checkout are the only significant savings here,
over returns from lower OOS. Maybe I've "missed" something here.

I think RFID is much like Hybrid cars so far. Sounds great but does not
stand up to sharp pencil just yet.

Gary McDougle
Distributor Operations Manager

BRG Inc.

Q.  What percent of imported food shipments into the U.S. are actually inspected?

A. About 2%, according to this week's Wall Street Journal

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