How to Reduce Logistics Costs
Though most e-commerce business owners go to great lengths to cut costs, they often overlook one of the most cost-intensive areas – the supply chain.
However, in order to continue delighting customers in a profitable yet sustainable manner, it’s important to look for ways to effectively reduce costs constantly. In this article, we’ll start by discussing what logistics costs are and go on to share some of the ways businesses can effectively cut back on logistics costs in their supply chain.
What Are Logistics Costs?
Logistics costs refer to the total expenses incurred moving products from the material procurement stage to product packing dispatch stage. Logistics costs incurred through the supply network are paid to various vendors, including manufacturers and suppliers, transport companies, third-party logistics services, and freight and shipping carriers.
Let’s quickly take a look at what contributes to logistics costs:
Warehousing. This includes either signing a lease or buying warehouse space. The warehouse option you go with must meet your specific requirements and have room for scalability.
Transportation. This is one of the most important (and most significant) costs. It includes transporting inventory from suppliers and manufacturers to your warehousing facility and finally to the end customers. It involves ground, air, and sea shipping (also called freight shipping) as well as delivering ordered products to customers at their address through shipping carriers.
Storage. This is a variable cost and depends mostly on the amount of inventory you store. The higher the amount, the greater the cost.
Equipment. You’ll need to purchase storage equipment to handle and store inventory. Remember, this typically includes pallets, racks, bins, boxes, forklifts, ladders, conveyors, and packaging material.
Hiring staff. You need to hire and train people to pick, pack, and ship your inventory properly. These costs will also include warehouse management, customer service, and staff members working at different service stations. You’ll also have to pay for your permanent and temporary staff members salaries and employee benefits.
Now that we have a better understanding of what logistics costs are let’s dig deeper and learn how you can reduce them and grow your business.
6 Ways Businesses Can Reduce Logistics Costs
Let’s take a look at some of the ways you can optimize your logistics costs.
#1: Optimizing Product Purchase and Storage
One of the ways you can cut your logistics costs is by optimizing the goods you sell. The more product SKUs you have to store and manage, the higher your logistics costs.
Start by analyzing your sales history to gather useful insights about your product catalog. Here are some questions you need to ask yourself:
Which SKUs generate the most revenue? For instance, are a small portion of your SKUs forming the majority of your total sales?
Which products do you restock frequently because they sell quickly?
Are there some product variations (sizes or colors) that don’t sell as much as others?
Do customers buy combinations of products frequently? If so, which ones?
By doing so, you’ll discover which of your SKUs are doing well and which ones aren’t. And, as a result, you’ll be able to make informed decisions regarding which products to discontinue and whether you should be scaling marketing efforts for other products.
#2: Purchasing Packaging Material in Bulk
Packaging costs may not seem significant at first, but they can add up fairly quickly over time.
To optimize your packaging expenses, start by figuring out your order weights and package dimensions, and select the right mix of packaging (such as cardboard boxes or poly mailer bags). You’ll get volume discounts by purchasing packaging and packing material in bulk.
While buying the packaging material in bulk may seem like a considerable upfront expense, the average per order cost of packaging products will go down as you process more orders over time.
#3: Routinely Reviewing Carrier Costs
There are several factors that affect the shipping costs of carriers, including fuel costs, demand for freight, and government regulations. These, in turn, force carriers to update their prices on an annual basis. For this reason, it’s a good idea to re-evaluate shipping prices across their services every year to see which one is the most cost-effective solution for your company.
A number of variables (such as next day delivery, 2-day delivery, how many packages you need to send, etc.) determine e-commerce shipping costs and can have a massive impact on your overall logistics expenses. You should regularly review carrier costs and analyze the prices charged by the following logistics companies to calculate shipping costs:
#4: Regularly Evaluating and Optimizing Operations
A lot of the time, businesses fail to recognize the importance of regularly re-evaluating their logistics expenses, operations, tools, and metrics.
Here are some quick questions that will help you assess the state of your company’s operations:
Is your warehouse design and layout suitable for your needs? Are you exploiting the full potential of your storage space?
Does your warehouse staff have pick lists optimized according to how you process customer orders?
What is the average time it takes between when a customer places an order to when it leaves the warehouse?
How often do you miss a delivery deadline?
Understanding how your shipping operations are performing can help you figure out whether you need to:
Reorganize containers, boxes, bins, or pallets.
Train your staff members to be more productive.
Optimize expensive processes to make them more cost-effective.
Overhaul your warehousing operations.
Warehouse management software will help you improve staff efficiency and reduce workload. Additionally, you can use warehouse KPIs such as inventory turnover, inventory to sales ratio, and perfect order rate, to measure the efficiency of your operations.
#5: Reducing Shipping Zones by Setting Up Multiple Warehouses
Shipping zones are the geographical locations to which shipping carriers deliver orders. They’re established based on zip codes and determined based on where the item is shipped from (also known as the point of origin) to its destination.
In other words, they’re calculated on the basis of the distance a package travels from the warehousing facility to the end customer. In the United States, for example, shipping zones range from Zone 1 to Zone 8. Carriers charge higher rates for zones that are farther away.
Storing portions of your inventory at multiple locations can actually help reduce logistics expenses since you won’t have to deliver to the highest (and therefore most costly) shipping zones. Using multiple storage locations will also help you reduce delivery costs by using ground shipping instead of air shipping for quicker delivery since you’ll be able to fulfill all orders from the warehousing locations closest to your customers.
One way to stay on top of your logistics costs is by reviewing your order history and gathering data on customer zip codes. Doing so will give you useful insights about which shipping locations are in the highest, most costly zones.
It’s also important to keep in mind that you’ll need a high enough order volume to set up multiple warehouses in a cost-effective way. So, if you only receive 100 or 200 monthly orders, using multiple fulfillment centers may not be the right solution for you.
#6: Enlisting a 3PL
Growing e-commerce businesses often enlist a third-party logistics (3PL) service provider to handle their logistics operations. Doing so allows them to fulfill their customer orders quickly and in a cost-effective way.
In addition to this, the business no longer has to bear the costs associated with hiring and training staff, equipment, and renting warehouse space – the 3PL ship's orders for several businesses from multiple warehousing locations.
Here are some actionable tips to help you evaluate 3PL service providers and find the one that best fits your needs:
Different services they offer. The more services you get from a single fulfillment company, the more smooth and scalable your supply network will become. The right 3PL provider can provide a customized solution depending on your specific needs and requirements.
Technology and software. Your 3PL provider should give you access to modern warehousing management solutions since your business is always growing.
Scalability. Choosing to store your inventory in a shared-facility allows the 3PL provider to cater to the needs of multiple customers. This way, they can fulfill client requirements without having to spend extra resources on acquiring additional storage space, staff, or equipment.
Multiple warehouses. The 3PL provider should help you identify the best warehousing locations to maximize the efficiency of your current and future order fulfillment needs.
Running a successful e-commerce business brings with it a lot of challenges – including many hidden logistics costs. These typically include transportation, packaging material, and shipping to high shipping zones. If you want to keep logistics costs low, you should consider enlisting a 3PL service to handle your warehousing, shipping, and order fulfillment operations.
Do you agree that hiring a 3PL service provider can help you effectively reduce logistics costs? Let us know by commenting below.