Total cost-logistic

The total cost approach is generated the idea that all activities that are found within the moving and
storing of goods and products need to be thought of as a whole, their total cost. It uses cost trade-
offs, when logistics expenses may increase in one area while decreasing in others.

The main objective is to find the lowest cost options that will still provide the support for the customer
services goals. When this approach is used in the decision making process it’s known as the total
logistics concept.

The total logistics concept:

The total logistics concept (TLC) aims to treat the many
different elements that come under the broad category of
distribution and logistics as one single integrated system.It is a
recognition that the interrelationships between different
elements, for example delivery transport and storage, need to
be considered within the context of the broader supply chain.
Thus, the total system should be considered and not just an
individual element or subsystem in isolation.An understanding
of the concept is especially important when planning for any
aspect of distribution and logistics. A simple, practical
example helps to emphasize the point:
A company produces plastic toys that are packaged in
cardboard boxes. These boxes are packed on to wooden pallets
that are used as the basic unit load in the warehouse and in the
transport vehicles for delivery to customers.
A study indicates that the cardboard box is an unnecessary cost
because it does not provide any significant additional
protection to the quite robust plastic toys and it does not
appear to off er any significant marketing advantage. Thus, the
box is discarded,lowering the unit cost of the toy and so
providing a potential advantage in the marketplace.
One unforeseen result, however, is that the toys, without their
boxes, can not be stacked on to wooden pallets, because they
are unstable, but must be stored and moved instead in special
trays. These trays are totally different to the unit load that is
currently used in the warehouse and on the vehicles (ie the
wooden pallet). The additional cost penalty in providing
special trays and catering for another type of unit load for
storage and delivery is a high one – much higher than the
savings made on the product packaging.

This example illustrates a classic case of sub-optimization in a

distribution system. It shows how the concept of total logistics
can be ignored at some significant cost. As the product
packaging costs have been reduced, those concerned with this
company function will feel that they have done their job well.
The overall effect on the total logistics cost is, in fact, a
negative one.
The company is better served by disregarding this potential
saving on packaging, because the additional warehouse and
transport costs mean that total costs increase.

This simple example of sub-optimization emphasizes the point

concerning the interrelationships of the different logistics
elements. A more positive viewpoint is to interpret these and
other interrelationships in a planned approach to identifying
and determining cost trade-offs.These will provide a positive
benefit to the logistics system as a whole. Such a trade-off may
entail additional cost in one function but will provide a greater
cost saving in another. The overall achievement will be a net
gain to the system.

This type of trade-off analysis is an important part of planning

for logistics. Four different levels of trade-off have been
identified:

1. Within distribution components: those trade-offs that occur

within single functions. One example would be the decision to
use random storage locations compared to fixed storage
locations in a depot. The first of these provides better storage
utilization but is more difficult for picking; the second is easier
for picking but does not provide such good storage utilization.

2. Between distribution components: those trade-offs between

the different elements in distribution.To reverse the previous
packaging example, a company might increase the strength
and thus the cost of packaging but find greater savings through
improvements in the warehousing and storage of the product
(ie block stacking rather than a requirement for racking).

3. Between company functions: there are a number of areas of

interface between company functions where trade-offs can be
made. This is illustrated in Figure 2.1, which lists some
potential trade-offs and indicates how the different company
functions might be affected. An example is the trade-off
between optimizing production run lengths and the associated
warehousing costs of storing the finished product. Long
production runs produce lower unit costs (and thus more cost-
effective production) but mean that more product
must be stored for a longer period (which is less cost-effective
for warehousing).

4. Between the company and external organizations: where a

trade-off may be beneficial for two companies that are
associated with each other. For example, a change from a
manufacturer’s products being delivered direct to a retailer’s
stores to delivery via the retailer’s distribution depot network
might lead to mutual savings for the two companies.
These types of trade-offs are thus at the heart of the total
logistics concept. For the planning of distribution and logistics,
it is important to take this overall view of a logistics system
and its costs. The other side of the equation is, of course, the
need to provide the service level that is required by the
customer. This balance of total logistics cost and customer
service level is essential to successful logistics. Total Cost Approach in
Logistics

Today the marketing view point of any organization is that the Customer is the King of the market.
Hence at whatever cost, the customer must be satisfied. Thus the importance of customer service has
grown day in and day out. Today a customer, well become the reason for a manufacturer’s downfall.

E.g.: if a customer has received goods which have been damaged in transit and which he is unable to
return or if the goods are of very poor and which, too he is unable to return, or which he finds great
difficulty in returning, he is likely to remain a one time customer. He may further even publicize his
adverse opinion to his colleagues, friends and others and caution them to be careful while purchasing
goods from this particular manufacturer. On the other hand, a satisfied customer would recommend a
particular product and a manufacturer and even give unsolicited testimonial to prospective customers.

Thus it has become important to keep the customer satisfied through good customer service, which
requires an up-to-date logistics system. The logistics system may require huge investments and at
times may become a large portion of the total cost incurred by the company.

The various costs involved in developing and maintaining a successful logistics system are:

Inventory cost
Inventory costs are directly affected by such factors as the mode of transport, the number of
warehouses planned, the levels of inventory maintained to ensure a certain level of service, etc. The
inventory costs are the cost of the money locked-up in the cost of goods, insurance, occupation of
space, pilferages, losses, damages, etc., as well as the maintenance of inventory. These costs are
increased by the cost of the obsolescence of a product over a period of time, especially when the
company makes rapid changes in product models or when products are perishable.

In this connection, the costs of a low inventory must also be taken into account. When the
manufacturer is unable to produce goods because of lack of raw materials or is unable to supply
goods because of inadequate finished products stock, he loses particular sales.

Warehousing costs

Goods have to be stored for sometime after production, however small that time interval may be.
This is done either at the production center, or in the marketing area, or somewhere in between or at
all the three locations. The warehousing of raw materials either steps up the cost of their supply or of
the cost of distribution of finished product. As a manufacturer wishes to approach the objective of
zero stock-out of the finished products or zero loss of production, adequate warehousing capacity
becomes essential; and this pushes the firm in higher fixed and operating costs of warehousing. Also,
to improve customer service to certain levels, it becomes necessary to increase the number of
warehouses. Accordingly, the company management has to arrive at the optimum number of
warehouses which is consistent with the minimum total cost of distribution, taking into account the
effect on the other elements of cost in the total logistical system.

Production or Supply costs

Production costs tend to decrease with an increase in the volume of production. Also, these costs
vary between various production points. If a manufacturer has several plants producing the same
product, he has to make a decision to vary the supplies or production from certain plants – a move
which inevitably affects the cost of production itself as well as the cost of transportation, transit
times, warehouse and inventory costs.

Channels of distribution costs

Various alternatives for distribution are available to a manufacturer. This distribution may be through
a sole selling agent at the nation level, Or through regional distributors or through wholesale dealers,
or by direct supplies to dealers and retailers and even to customer. Mail order sales or catalogue sales
at different retail outlets of a manufacturer are direct sales to the customer, which automatically
involve decisions on the establishment of stockiest and storage points or warehouses.

In the traditional marketing concept, the manufacturer is interested in scaling down the discount to
the distributor to reduce the total cost. But if the distributor’s discount is low, he may not, perhaps
because of his low profit margin, distribute the goods either in sufficient volume or he may not
render satisfactory customer service. This may bring about a loss of present and future sales to the
manufacturer.

Similarly, changes in the distribution system may take place by alternative use of space, say, for
inventory, or for marketing or for production centre. This may also affect customer service in one
way or the other. Therefore, a company has to carefully select channels of distribution since it affects
decisions relating, ultimately, to customer service and satisfaction.

Communication and Data Processing Costs

An effective distribution system requires continual of order pricing, inventory control, accounts
receivable, dispatches, etc. An increased number of distribution points would certainly improve
customer service, but would make processing of information more cumbersome and expensive.

the same time, if the time taken to process the information is decreased, it is likely to lead better
customer service. A manufacturer has, to decide about the speed and convenience with which
information may be processed. One of the ways is use of computers having advanced software.

Transportation Costs

The cost of transport varies generally with the speed with which goods are transported. Water
transport is the cheapest, while air transport is the most expensive. Rail transport is cheaper than road
transport, beyond a certain distance. Both rail and road transport stand somewhere in between water
and air in terms of the cost of transport.

Material Handling Costs

A suitable material handling system should be designed to reduce the cost of material handling to the
minimum. This would require the consideration of several possible combinations of manual and
 mechanized handling of the goods and materials. But material handling operations have an impact on
other distribution aspects, such as the cost of packaging as well as damages and losses that results
form material handling. The design of the material handling system and the consideration of its cost
also affect the selection of the mode of transport to be used and hence the cost of transport gets
affected.

Packaging Costs

Decisions on packaging are affected by decisions on such factors as type of product, the mode of
transport and type of material handling equipment used. A total cost approach would make it
necessary for us to select packaging version, which takes into account other distribution factors as
well. Thus it would not be sufficient merely to reduce the cost of packaging to the minimum.

Customer Service Costs

If the manufacturer or supplier guarantees the satisfaction with goods and agrees to give a refund on
returned goods or exchange the returned goods, he must arrange for the movement of defective or
returned goods from the customer (or retailer) back to the supply warehouse or manufacturing centre.
Complaints of defects or of the deficiencies pointed out by the customer in the goods that are
returned may therefore be utilized as a management feedback to improve the quality of service.
Incidentally, with such a guaranteed service the manufacturer on a permanent basis, would win the
customer’s loyalty. Guaranteed customer service, therefore, involves certain costs to the organization
but it also leads to certain benefits in the long run. It increases the value of the company in the market

Total cost approach to logistics is the key to managing the logistics function.
Management should strive to reduce the total cost of logistics rather than the cost
of each activity. So logistics must be viewed as an integrated system rather than the
individual system, because reduction in one cost invariably lead to increase the cost
of other components. Effective management and real cost savings can be
accomplished only by viewing logistics as an integrated system and minimizing its
total cost given the firms customer service objectives. So the main costs which are
involved in logistics function are:

1. Customer service level costs

2. Transportation costs
3. Warehousing costs
4. Order processing and information costs
5. Lot quantity costs
6. Inventory carrying costs

Customer Service Level Costs

 Most business people find it difficult, if not impossible to measure this cost. The cost
associated with alternative customer service levels is the cost of lost sales( not only
the margin lost by not meeting current sales demand, but the present value of all
future contributions to profit forfeited when a customer is lost due to poor availability,
long lead times, or other service failures).

By comparing total logistics system costs, management can make

knowledgeable judgment about the likelihood of recovering, through increased
sales, the increase in total system costs brought about by an increase in customer
service levels. Of course, management could also reduce spending in some other to
component of the marketing mix – promotion, for example – in order to maintain
profits with a similar sales volume. Likewise, with decrease in customer service
levels, management can improve profitability or increase expenditures for
other components of the marketing mix in an effort to maintain or improve
market position. At the end the goal is to determine the least total cost method of
logistics while keeping customer service objectives in mind.

Transportation Costs
Costs associated with the transportation function can be identified in total and be
segments (i.e. inbound, outbound, by vendor, by customer, by mode, by carrier, by
product, or by channel). This detail is necessary to determine the incremental costs
associated with changes in the logistics system. If transportation costs are
not currently available in any other form, management can determine them at
a relatively low cost by sampling product flows and auditing freight bills (for common
carriers) or corporate accounting records (for private fleets).

Warehousing Costs
Warehousing costs are all the expenses that can be eliminated or that must
be increased as a result of a change in the number of warehousing
facilities. Warehousing costs should be separated into two distinct categories:

1. Throughput Costs: These costs are associated with selling product in a given
market by moving it into and out of a warehouse in that market, and the fixed
costs associated with the facility. Example is charges that public warehouses
assess for moving product into and out of their facilities, and the costs of leased
and owned facilities for the movement of the goods.
2. Storage Costs: Warehousing costs related to inventory storage should be
included in inventory carrying costs. These warehousing costs change with the
level of inventory held in a specific warehouse and tend to be negligible in a
company- owned or leased warehouse.
 Throughput costs should be included instead in warehousing costs so that
the increments can be easily added or subtracted when the logistics
system configuration system changes.

Order Processing and Information Costs

Order processing and information costs include the cost of order transmittal, order
entry, order processing, related handling costs, and associated internal and external
communication costs. When establishing these costs management should
remember to include in the analysis only those costs that will change with decision
being made.

Lot Quantity Costs

Lot quantity costs are those production related or purchasing/acquisition costs
that will change as a result of a change in the logistics system. Generally it consists
of production preparation costs, capacity lost due to changeover, materials
handling, scheduling and expediting. The lot quantity costs associated with
purchasing are the costs of buying in various quantities.

Inventory Carrying Costs

Conceptually inventory carrying costs are the most difficult costs to determine
next to the costs of lost sale. Inventory carrying costs should include only those
costs that vary with the level of inventory stored and that can be categorized into 4
costs.

 Capital costs
 Inventory service costs
 Storage space costs
 Inventory risk costs.

KEY FACTORS FOE EFFICIENT LOGSTIC SYSTEM

Proper Planning
The first step to accomplishing a task is planning. Now, planning encapsulates
various factors. It involves procuring the goods, storage facilities, and delivery
of products to the exact location.
 Apart from these, the other parameters are – time, transportation, and the
costs. A supply chain operative should be able to devise the flow chart for the
whole operation. The purpose of planning is to attain maximum work in the
least possible time. At the same time, the planning should aim at maximizing
the profits.

Proper planning is a wise plan, but an experienced manager will be able to

prepare for the unforeseen circumstances as well. These situations can be
related to:

 The products
 Unavailability of the transportation
 Any internal issue in the organization
For this, a contingency plan should be there to avoid any logistics
failure. Logistics planning process is incomplete without an emergency
plan.
Adopt Automation
In the age of automation, technology plays a major role in increasing the
efficiency of an organization. Automation has a vital role in the business
process optimization. There is valuable software that can be deployed in the
logistics process.
For example, business process software can be integrated that provides
timely updates regarding the movement of goods. The operator and the client
will get details regarding:
 The goods that are dispatched from the supplier
 Procurement of the goods at the warehouse, and lastly,
 Delivery of the goods at the destination
This saves a considerable amount of time because manual interference is
eliminated. Moreover, accurate tracking help in improving overall process
management.

Similarly, the account details and employee details can be managed using
specific software developed for these tasks. Therefore, the logistics firm
should embrace the technology for increasing productivity.

Value Relations
The team is an essential aspect of an organization that is responsible for the
growth. Whether it’s the delivery guy or the warehouse manager, everyone
should be perfect in their respective field of work.

For this, you need to invest in proper training of the employees. Regular
training workshops keep the employees updated with the latest trends in the
logistics industry. This helps in increased efficiency and satisfaction of the
clients.
Logistics manager with impeccable interpersonal skills is crucial for the
organization. There are times when the things don’t work according to the
plan. In this situation, instead of panicking, you need a reliable person who
can sort out the issues with utmost efficiency.

Moreover, the manager should have authoritative contacts in the industry.

This can be beneficial in tapping the business opportunities.

Warehouse Management
Effective logistics management is incomplete without proper warehouse
management. Warehouse operations are considerably dependent on the type
of goods.
For example, perishable goods, such as dairy products, needs refrigeration
facilities. Grains should be stored in moisture free environment. Similarly, the
specifications vary according to the products. The logistics firm should aim at
developing the warehouse inventory so that there is minimum wastage of
goods.
Moreover, maximize the storage capacity of the warehouse. Usage of vertical
storage columns is recommended. Effective implementation of the software
for sequencing the products is necessary because there should be no delay
while locating the product when the order is placed. The warehouse staff
should be well-trained for the warehouse operations.
 Efficient Transportation
Transportation department can be analyzed to decrease the expenses of the
logistics firm and at the same time, it can be revamped for faster delivery of
the products. Following factors should be considered for efficient
transportation:

 Determining the best delivery route. A logistics firm should opt for the shortest
yet safest route. This is beneficial for saving money as well as time.
 Cost-effective packaging that ensures low investment and safety of goods as
well. Optimize the packaging so that it occupies less volume and it does not
increase the weight of the package.

Measure and Improvise

Logistics network optimization is incomplete without integrating measurement,
analysis, and feedbacks. When you deploy new strategies in the system, you
 need to measure the output. This is important as it intimates the success or
failure of the strategy.

Measurement tools and software should be integrated that easily determines

and classifies the information as per the requirement. Your future planning is
heavily dependent on the measured information. Analyze the metrics related
to different operations. This includes:
 Cycle time metrics
 Cost metrics, and
 Service metrics
Generous feedbacks help in improvising. The ideas and suggestions of the
employees should be recorded periodically. This ensures that you generate a
pool of ideas and at the same time, it reveals any flaws in the system.

Conclusion
If you wish to trump over your competitors, you should adapt the latest
technology and innovative approach. The aim of effective logistics
management is to improve the efficiency of the operations, ensuring customer
satisfaction, and increase productivity.

These tips and strategies are necessary for process optimization. Every
logistics firm that is struggling to boost their operations, they can incorporate
these suggestions for logistics network optimization.

About the author: Robert Everett- is a well-known blogger and writer at UK

EduBirdie, in Chicago. While studying cultural studies, Robert has published
one volume of educational manuals on logistics. His life credo is: “Never lose
sight of your hope and faith, let them remain your guiding light even through
the darkest times”. Now he is seeking for new opportunities to spread his
knowledge among international writing platforms.

DECISION MAKING
It begins with procuring the materials or services needed to create the end product and
continues until the finished goods are in the customer’s hands. This process typically
involves a range of decisions and transactions between several distinct entities.
The Supply Chain Continuum
The supply chain begins with acquiring the goods or materials needed to satisfy the end
product. Businesses must choose vendors, freight carriers, and possibly warehouse
solutions. Inventory storage and the handling of goods-in-process are part of supply chain
management as well. Marketing and distributing the product to the consumer wraps up the
process.
Essentially, supply chain management includes every decision made about the products or
services a company delivers to their customers. The best way to understand the various
phases of supply chain management and how certain points influence others is to look at
the 3 levels of SCM decision-making a bit closer.

Strategic Planning
Every effective supply chain strategy begins with solid long-term decision-making. The
strategy level lays the groundwork for the entire supply chain process, from beginning to
end, and is an essential part of supply chain management. Strategy level supply chain
decisions are usually the first step of developing a good process.
Issues addressed at this level include:
 Choosing the site and purpose of business facilities
 Creating a network of reliable suppliers, transporters, and logistics handlers
 Long-term improvements and innovations to meet client demands
 Inventory and product management throughout its life cycle
 IT programs and systems to make the process more effective

Tactical Management
Businesses make short-term decisions involving the supply chain at the tactical level. At the
strategy level, general planning begins, but processes are actually defined at the tactical
level. Tactical decisions play a big role in controlling costs and minimizing risks. At this
level, the focus is on customer demands and achieving the best end value.
Common concerns include:
 Procurement contracts for necessary materials and services
 Production schedules and guidelines to meet quality, safety, and quantity standards
 Transportation and warehousing solutions, including outsourcing and third-party
options
 Inventory logistics, including storage and end-product distribution
 Adopting best practices in comparison to competitors
The Operational Level
The operational level of supply chain management is the most obvious. These are the day-
to-day processes, decision-making, and planning that take place to keep the supply chain
active. The mistake that many companies make is to jump straight into operational
management without focusing on the strategy and tactical levels. Effective operational level
processes are the result of strong strategical and tactical planning.
Some aspects of operational level management are:
 Daily and weekly forecasting to figure out and satisfy demand
 Production operations, including scheduling and detailed management of goods-in-
process
 Monitoring logistics activity for contract and order fulfillment
 Settling damages or losses with suppliers, vendors, and clients
 Managing incoming and outgoing materials and products, as well as on-hand
inventories
The most effective supply chain strategies are the result of a holistic management
approach. When all 3 levels of supply chain management are given proper attention, every
member of the supply chain benefits.