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Optimizing logistics costs from the inside
Reducing logistics costs while maintaining service levels requires logistics leaders to take a careful look within their organizations, according to data from global research and advisory firm Gartner Inc. released this week and due for further analysis at the group's Supply Chain Planning Summit next month.
Gartner's report, "5 Actions to Optimize Logistics Costs from Within the Organization," explains why logistics professionals should place less emphasis on negotiations with outside carriers and providers and instead examine internal practices that can help optimize their companies' logistics costs.
"Logistics costs are on the rise in many regions—the result of tariffs, rapid e-commerce growth, and a tight labor market," Farrah Salim, senior principal analyst with the Gartner Supply Chain Practice, said in a statement. "When logistics leaders are asked to reduce costs, they usually aim to negotiate better prices with their carriers and logistics providers. Those negotiations can be difficult, and success is not guaranteed. What is often overlooked is that there are plenty of actions logistics leaders can take to optimize costs from within their organization."
Gartner's five actions for optimizing logistics costs are:
- Eliminate Costly Errors. In logistics, errors occur regularly and often come at a cost. For example, shipments may be non-deliverable due to flawed data, and containers may collect demurrage at ports because import/export documentation isn't complete. To avoid future errors and their associated costs, logistics leaders must identify the source of errors and continuously improve their shipping processes. "If you have to deal with errors regularly, there is probably a systemic process issue," Salim said. "Lean principles and Six Sigma are great tools for detecting and eliminating such issues—and for optimizing costs."
- Evaluate Value-Added Services. Most logistics providers perform some form of value-added service per instruction. These services can be as simple as product labeling or as complex as full product customization. Outsourcing certain tasks to the logistics provider is convenient for logistics leaders, but they should always evaluate whether the convenience is worth it. There might be a more cost-effective approach, such as completing the service in-house or through a supplier at an earlier point in the supply chain.
- Consolidate Shipments. Shipment consolidation can be a tremendous cost saver. Logistics leaders can align inbound and outbound transportation movements, so all trucks and containers hold as much capacity as possible. "If it's not possible to achieve a full load, consider collaborative distribution. When a non-competitor organization already uses the same distribution center and the same carriers as your organization, and delivers to the same retailers, why not work together to coordinate shipments and share the cost?" Salim said.
- Enhance Internal Collaboration. In addition to external collaboration, internal cross-functional teams with other groups in the supply chain are a key factor for cost optimization. For example, logistics leaders should know about changes in demand planning, so they can adjust transportation, warehousing, and labor capacities in advance—and thus gain time to negotiate the best price.
- Educate Decision Makers. The fifth action to reduce logistics costs internally is probably the most important. Leaders must educate decision makers about what their decisions mean for logistics and inform them about expenditures and trade-offs. "If decision makers want to lower transportation costs, this might mean that delivery speed must be sacrificed. If they prefer a lean inventory, transportation costs will rise. Decision makers have to understand how their actions relate to logistics spend and how the available options affect the organization's bottom line," Salim said.
Stamford, Conn.-based Gartner will host its Supply Chain Planning Summit November 4-5 in Denver.
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