Logistics Costs: 8 Explained and How to Reduce Them

by Vector | Oct 3, 2021 8:43:23 PM

In the post-pandemic world, uncertainty within the supply chain has run amok. The news is filled with reports about backed-up ports, disrupted shipments, labor issues, and rising logistics costs.

As one NPR.org story said, "Cargo is piling up everywhere." The same story notes that ocean vessels are waiting up to five days to get into port. In addition, it can take 10 more days for a container to be loaded on a train. Those delays are creating ripple effects throughout the global supply chain.

But on the other hand, we don't hear as much about how to solve these issues.

So, today we'll explore logistics costs—and ways to reduce them. We've identified several classic cost sucks in logistics. And we'll offer ways to reduce costs.

Here's what we'll cover:

  1. Digitization
  2. Supply chain visibility
  3. Freight consolidation
  4. Fewer deadheads
  5. Use of telematics
  6. Trucking contracts
  7. Bulk fuel contracts
  8. Aerodynamics

Digitization

Let's start with a bit of good news: Yes, cargo and freight are still shipping! There are freight logjams everywhere. And there's a lot of work that needs to be done to reduce logistics costs.

But in a recent interview with Bloomberg, Gene Seroka recently reported that a new digitization strategy is helping at the Port of Los Angeles, which he oversees. He called this digitization tool, which his team developed alongside the Wabtec Corporation, the "port optimizer."

Seroka estimates that 95% of port data now travels through the port optimizer. He also made the classic call to arms for digitization. Indeed, for digitization to flourish, everyone needs to adopt it.

Yes, there are costs associated with digitization. But reams of paperwork also come at a cost. When we consider the pros and cons, digitization will likely save companies countless dollars, especially in opportunity costs. Think about it from the customer's perspective—when it comes to digitization, it's a binary, go/no-go gauge for partners. You're either in (the system) or you're out!

In other words, a stronger global supply chain means there are no blind spots in the data. Put another way, what we're also talking about is supply chain visibility.

Supply Chain Visibility

Backed by shared, digitized data, supply chain visibility means partners get a look upstream at what the future holds. Seroka mentioned the port optimizer digitization platform earns them as much as three to four weeks of visibility. From a planning perspective, that data is gold.

In general, shared information between stakeholders can optimize efficiency. That includes internal teams, cross-functional teams, and third-party partners.

Beyond that, digitization is the first rung of what you could describe as the logistics tech ladder. There can be no blockchain adoption without digitization. There can be no control towers without digitization. And if we read between the lines on what Seroka is saying, the best way to ease the supply chain bottleneck is through digitization as well.

Freight Consolidation

Don't ship air. I'm completely fine with air as long as it's cases of canned Perri-Air from the movie Spaceballs. Unless it's that kind of fresh air, I want those trailers packed full and cubed out. This is a classic logistics issue.

First of all, sensitive freight, such as hazardous materials, doesn't consolidate well with, say, food. But frozen food certainly could consolidate with other frozen food destined for the same warehouse.

Here's another example. On one side of town, you've got a hydraulic tubing part manufacturing company. On the other, you've got another manufacturer of subcomponent parts. Both ship partially filled trailer loads of these products to the same original equipment manufacturer (OEM) distribution center.

With a little shared data, coordination, and supply chain visibility, those two shipments could become one. There—you just halved your logistics costs!

By the way, we've already mastered this idea in the LTL world! Also, some thoughtful freight consolidation may lead to fewer deadheads.

Fewer Deadheads

Deadheads have long been a drain on the logistics industry as a whole. No, not fans of the Grateful Dead! Deadheads are when trailers must travel empty for a painful distance before a driver can get to their next load. In other words, a deadhead means a driver has no backhaul or return shipment.

There are some notorious deadhead freight lanes that make them more expensive. For example, a lot of freight goes into Florida, but not as much gets shipped out.

On a global scale, you could argue that the United States is a deadhead lane. One of the classic inefficiencies of global logistics is unbalanced trade deficit between the United States and the rest of the world. Gene Seroka estimated that it's a 5-to-1 ratio of imports to exports.

Indeed, according to an NPR.org story, three-quarters of all containers leaving the Port of Los Angeles are empty!

The result of this trade deficit is similar to what a frustrated driver does when they're stuck in Miami. They deadhead.

Use of Telematics

Telematics technology tracks and monitors all kinds of driver behaviors and truck health. The goal with telematics is twofold: increase good driving habits and reduce fuel consumption.

Yes, telematics collects driving data, and some drivers don't like that. But this data protects good drivers who have fuel-efficient habits. For example, slower acceleration, lower average speed, slower braking, and proper shifting all lead to reduced logistics costs. Another big data point identified by telematics is idle time. When idle time declines, so do logistics costs.

Trucking Contracts

Trucking contracts can reduce logistics costs by locking in rates. When a long-term or dedicated trucking contract can be arranged between a shipper and a carrier, all parties get a measure of security.

The shipper and carrier know they'll get repeat business at a standard rate. And drivers get more of a set schedule. Nothing wrong with that!

Bulk Fuel Discounts

Oil prices can be volatile throughout the year. Even when unleaded prices see a drop, diesel prices tend to remain higher.

Thus, it makes sense to reduce logistics costs by locking in bulk fuel discounts. According to TCS Fuel, carriers with a bulk fuel discount can save an average of 40 cents per gallon. And according to the the HDS Institute, truckers can drive anywhere between 45,000 and 100,000 miles in a given year.

By some reports, the average fuel economy for a semi truck is around 6.5 miles per gallon. But fuel efficiency is trending up, so let's use 10 mpg for math purposes. At 10 mpg, a driver could burn 10,000 gallons of diesel in a year. That means a bulk fuel discount would save that driver $4,000 annually!

Aerodynamics

OK, let's stay on fuel efficiency. By now, aerodynamic bolt-ons have been around a while. That's because they work. Accessories for trucks and trailers like roof fairing, trailer skirts, wheel covers, aero kits, and trailer tails all improve aerodynamics.

If you cobble together all these accessories, you could really reduce your logistics costs.

Reduce Your Logistics Costs

Regardless of where your business lives on the supply chain family tree, a reduction of logistics costs keeps dollars in your pocket.

Many businesses are throwing money and hours at the current supply chain challenges. I think we need to work smarter, not just harder.

We haven't even touched on the other costs. Uncertainty is hard. Long hours are hard. Living in react-mode takes a toll. We take that stress home. And life can lose its zest after a difficult stretch.

As such, I believe digitization can help with that, too. Call it a soft benefit if you want. But consider the three to four weeks of visibility Gene Seroka described. That kind of visibility can add back a measure of certainty to every person touching logistics. Everyone instantly feels better. In general, communication and up-front discussion (especially when things are going south) is good for people. Ultimately, we humans do our best problem solving together.

Logistics is a vital but difficult industry, even in normal times! So take care, and watch for signs of burnout among your peers—and in the mirror.

This post was written by Brian Deines. Brian believes that every day is a referendum on a brand’s relevance, and he’s excited to bring that kind of thinking to the world of modern manufacturing and logistics. He deploys a full-stack of business development, sales, and marketing tools built through years of work in the logistics, packaging, and tier-1 part supply industries serving a customer base comprised of Fortune 1000 OEMs.

Subscribe Now

Additional Reading