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Hidden logistics costs

Hidden logistics costs

LFA-technology defines three main sources of hidden value, and, respectively, three main areas for logistics analysis, which can result in achieving higher financial efficiency via the improvement of the logistics function:

  • operating expense reduction,
  • working capital reduction,
  • improved return on assets.

 Operating expense reduction
This is one of the key areas for uncovering hidden logistics value and potential performance improvement.

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Main sources of hidden value are:

  • Warehouse Costs. Many companies possess unused opportunities to decrease significantly direct logistics labor costs, even in warehouses which already apply a Warehouse Management System (WMS). New technologies and an increased knowledge of best practices help to achieve more efficiency than previously possible.
  • Inventory Carrying Costs. Expenses associated with excess or uncontrolled inventory (damage, shrinkage, etc.) can be significantly reduced and have a direct impact on distribution center costs and revenue.
  • Transportation Expenditures. The amount of hidden value varies significantly depending on the type of transport a company uses and on its Transportation Management System (TMS). Many companies have the potential to reduce their shipping costs 10-25 %, which can unlock millions of dollars of hidden value.
  • Foreign Trade Expenses. Foreign trade is one of the most difficult logistics tasks for companies, which requires smooth operation of many company’s departments. Lack of synchronization between purchases (import) and sales (export), accounting and logistics departments can lead to costs increase related to foreign trade activity.
  • Administrative Costs. This implies not only costs related to distribution centers, but also costs for customer service, expediting, and other expenses in centralized areas which are affected by logistics.
  • Total network expense. Improvements in logistics procedures and processes can lead to a decrease in the number of distribution centers necessary and their related fixed and variable costs. More efficient use of warehouse space and decreased amounts of inventory will lower the necessity of external warehouses and their related costs.

 Working Capital Reduction
Decreased working capital requirements have a significant impact on a company’s performance indicators and shareholder value. A leading producer of computers, Dell Computer Corporation, became famous on the stock market due to its negative working capital. Rapid inventory turnover and the ability to collect payments from customers prior to paying suppliers’ invoices, resulted in the company having negative working capital, altering traditional understandings about working capital management.

Reducing working capital is a top priority of any company because it leads directly to an increase in a company’s value. A sound logistics system can positively affect a company’s working capital in many ways:

· Faster inventory turnover

· Decreased safety stocks and overall inventory levels

· Reduced receivables via more accurate and rapid `order` fulfillment and via more complete information (ex. the principle of “the perfect `order`”) which helps minimize customer discrepancies, increase customer satisfaction, and accelerate clients’ payments

· Improved cycle times which effect the speed of warehouse processing and accelerate cash-to-cash cycle

The ability of logistics to influence the inventory level and working capital requirements becomes for many companies, especially in the technology sector, a driving force to adopt “postponement strategies,” which involve keeping SKUs generic as late as possible in the `order` fulfillment cycle.

 Improved Return on Assets
Return on Assets (ROA), or profit divided by fixed assets value, is a key indicator of company’s performance.
Millions of dollars can be locked in the logistics systems in the form of distribution centers, material-handling equipment, and transportation fleet. The capital for acquiring these assets comes from shareholders who expect a return on their investment.
Logistics can bring value by directly improving the return on assets. Improvements in distribution and productivity reduce investment requirements for inventory and equipment,  and, simultaneously, increase the profitability of current distribution centers. Hence, both the numerator and denominator of the ROA ratio are positively effected.

In many cases improvements to logistics systems help decrease the quantity of expensive warehouse equipment, or eliminate its necessity entirely. Transportation fleets can be decreased with the help of better scheduling and effective management.

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