If You Want to Cost Optimize Logistics, Learn How to Eat an Elephant

By David Gonzalez | August 02, 2022 | 0 Comments

Supply ChainPower of the ProfessionSupply Chain Customer Fulfillment and Collaboration

Is the prospect of optimizing cost in a capacity-constrained and price-spiking logistics environment a lost cause?

Absolutely not. Logistics leaders must get smarter at cost optimization, seek opportunities beyond cost reduction and learn to eat elephants. The only way to accomplish that last, seemingly daunting feat is, as the saying goes, one bite at a time.

Barely six months ago, the average cost of transporting a 40-foot, general-purpose container was about $10,000 compared to around $1,700 in 2019. This year, in some regions, logistics wages have increased by as much as 17%. Demand for warehousing space has never been higher, with major global logistics hubs in countries such as the Netherlands, Singapore and the United Kingdom reporting occupancy rates at more than 95%. For logistics leaders, costs to operate remain stubbornly high. Despite an increasingly pessimistic economic outlook, the logistics industry remains buoyant as demand for services is high.

For some companies, logistics costs account for nearly 80% of overall supply chain expenditures. So, it is unsurprising that as cost pressures grow, supply chain leaders are turning to their logistics colleagues to identify and implement ways to optimize their operations.

A recent Gartner Logistics 3PL Capacity and Disruption Poll captured sentiment among logistics leaders. As detailed in Figure 1, respondents believe that logistics budgets will further increase in 2023. Compared to 2022, more than half of those surveyed suggested that their logistics budgets would increase between 5% and 10%.

Cost reduction and cost optimization are not one and the same, but neither are they mutually exclusive. Logistics leaders must distinguish between those activities that will reduce cost versus those that will optimize cost. Mature organizations combine both to achieve the best outcomes. Logistics leaders and other supply chain professionals must be realistic about how much can be saved and how quickly. Depending on whether the logistics function is seeking to reduce cost by operating better or deliver more sustainable cost optimization by altogether transforming how it does things, logistics leaders must manage their expectations and those around them.

Many different aspects of logistics performance and operational execution influence the cost of logistics. Supply chain leaders often overlook, or do not sufficiently consider, the trade-offs between services offered and costs generated. For example, often logistics leaders talk about the Amazon effect on logistics. Commercial colleagues claim if the logistics function could replicate the speed and availability of services offered by Amazon the company would secure more customers and increase sales. Companies are increasingly turning to their logistics leaders to create a differentiating and competitive advantage for their products and services. What these internal stakeholders do not appreciate is the cost associated with replicating Amazon´s logistics behaviours.

Top Tips on Logistics Cost Optimization

  • Assign opportunities by categorizing each one into cost reduction or cost optimization. Avoid bias in one direction or another, both are equally important and will deliver results.
  • Accelerate cost reduction by focusing on the basics. Companies are often surprised by how much cost reduction can be achieved by focusing on eliminating waiting times, wasted journeys and wasteful processes. Interrogate cost centers associated with logistics expenditure, in particular isolate ancillary charges that were not budgeted for. By understanding the root cause of additional costs like waiting times, companies can remove constraints, apply changes to processes or change pricing agreements.
  • Avoid barriers that may constrain changes in behavior by assembling resources within logistics and other external stakeholders. Cost optimization requires broad participation often beyond the confines of the logistics organization. Engaging functions such as procurement, customer service and finance will secure both support and momentum for your cost optimization initiatives. Explain a rolling list of initiatives, encompassing short-, medium- and long-term projects and how each will deliver benefits over a sustained period of time.
  • Build confidence in logistics management and capabilities by using metrics to demonstrate a deep understanding between cost control and service excellence. There is often a trade-off between the cost of the service and the level of service that can be achieved. That is why logistics leaders must use various metrics such as Days to Deliver, On Time in Full and Cost to Serve to demonstrate trade-offs. Explain how myopic views of individual metrics is not an effective, or prudent, method of managing logistics.

When it comes to cost optimization everything is possible. And, as Figure 2 demonstrates, when dealing with large, overwhelming situations, logistics leaders must learn to eat elephants … piece by piece.

David Gonzalez
VP Analyst
Gartner Supply Chain
David.Gonzalez@gartner.com

 

Listen and subscribe to the Gartner Supply Chain Podcast on Gartner.comApple PodcastsSpotify and Google Podcasts

Leave a Comment