Lm slide chapter 4

-C 4 : Warehousing costsC 4 = q.t.g +C xd +q.k.g -t : storage time -g : the average storage cost per unit/day -k: the rate of loss or damage when goods are in stock -g: the value of inve

CHAPTER 4:

LOGISTICS COSTS

HO CHI MINH CITY UNIVERSITY OF TRANSPORT

LEARNING OBJECTIVES

After completing this Chapter, students should be able to:

ü Explain the Logistics cost components

ü Illustrate the factors that affect Logistics cost

ü Discuss the basic solutions to reduce the Logistics cost

CHAPTER OUTLINE

4.1 Logistics cost components

4.2 Factors affecting Logistics costs

REFERENCE LIST

[1]-Alan Harrison and Remko van Hoek (2008), Logistics Management and Strategy, Nxb FT

Prentice Hall – Chapter 3

[4]-Douglas M.lambert James R.Stock,Lisa M Ellram, Fundamentals of Logistics Management,

Mc grow Hall,1998 – Chapter 1

[10]-Đặng Đình Hào, Trần Văn Bảo, Phạm Cảnh Huy, Đặng Thị Thúy Hằng (2018), Giáo trình

Quản trị logistics, Nxb Tài Chính – Chapter 1

[12]-Trường đại học Kinh tế Tp HCM (2012), Quản trị hậu cần, Nxb Đại học kinh tế quốc dân –

Chapter 2

4.1 LOGISTICS COST COMPONENTS

+ C1: Customer service costs

+ C2: Administrative costs

+ C3: Order processing and information costs

+ C4: Warehousing costs

+ C5: Transportation costs

+ C6: Inventory costs

a- Opportunity cost of inventory capital

b- Inventory carrying cost

c- Loading/unloading cost inside the warehouse

d- Inventory risk costs

C log = C 1 + C 2 + C 3 + C 4 + C 5 + C 6

-C 4 : Warehousing costs

C 4 = q.t.g +C xd +q.k.g

-t : storage time

-g : the average storage cost per unit/day

-k: the rate of loss or damage when goods are in stock

-g: the value of inventory units

-C xd : handling cost

-C 5 : Transportation costs account for 1/3 to 2/3 of total logistics costs

-C 6a : Opportunity cost of capital for inventory

C 6a = q.k.[(1+r) t -1]

-q: the inventory for a shipment

-k capital required per unit of products

-t storage time

-r interest rate payable on loan

4.2 FACTORS AFFECTING LOGISTICS COST

4.2.1- Order cycle factor

Order cycle (days) Units of inventory

Figure 4.2 Relationship between order cycle and inventory

+ A customer is using 20 units of product/ day

+ Order cycle time (OCT) is 10 days

+ Customer’s average inventory during order cycle time is 100 units (200/2)

+ If OCT is reduced to 6 days g average inventory will be 60 units

Let’s take an example…

If the supplier improves customer services by shortening the OCT g less inventory for customers g less inventory cost g lower the logistics cost

E

P M

4.2.2- Inventory factor

Units of inventory

Logistics cost

COLS (Cost of lost sales)

IC(Inventory cost)

TC (Total cost)

Figure 4.3 Relationship between cost of lost sales and inventory cost

4.2.3- Transportation factor

Logistics cost

Improved transportation service

COLS (Cost of Lost Sales)

TrC (Transportation Cost)

TC (Total Cost)

Figure 4.4 Relationship between cost of lost sales and transportation cost

4.2.4- Inventory level versus transportation cost

Logistics cost

Units of inventory

IC (Inventory Cost)

TrC(Transportation Cost) TC(Total Cost)

Figure 4.5 Relationship between inventory cost and transportation cost

4.2.5- Product weight density

Logistics cost

Weight density of product

IC (Inventory cost) WC(warehousing cost)

TrC (Transportation cost)

Figure 4.6 Relationship between cost of lost sales and transportation cost

4.2.6- Value of product

Logistics cost

Value of product

IC-Inventory cost (including storage)+WC

TrC-Transport cost

PC-Packing cost

Figure 4.7 Relationship between product value and logistics cost

4.2.7- Susceptibility to Loss and Damage

Logistics cost

PC- Packing Cost

TrC-Transport Cost

WC-Warehousing Cost

Figure 4.8 Relationship between product susceptibility to Loss and

Damage and logistics cost

4.2.8- Distance factor

B M

ITC=0.7

ITC=0.6

OTC=0.8

ITC=0.5

ITC=0.4

No Cost of product A Cost of product B Difference (A-B)

1 ITC=0.4+0.5= 0.9 ITC=0,7+0,6=1,3 -0,4

TTC=0,9+0,8=1,7 TTC= 1,3+2,5=3,8 -2,1

Let’s have a look at the example below…!

(Currency: million VND)

Figure 4.9 Logistics and Spatial Relations from attachment

(Source: Center for Supply Chain research, Penn State University)

4.2.9- Logistics service

C2

C1

S2 S1

Logistics Cost

Logistics Service

Figure 4.9 Relationship between Logistics cost and logistics service

Logistics

Cost

C2

Service

C1

A

B

Figure 4.10 The Direction of Improvement in Logistics systems