The cost reduction process is only possible by dividing the total cost into two main categories which are Variable cost and Fixed Cost.
Fixed Cost includes Electricity, management overheads, rent of warehouse & vehicle, inventory carrying cost, handling cost, etc.
Variable Cost includes labor pay, transportation cost, material movement cost, packaging cost, labor overtime, the maintenance cost of vehicle and warehouse, etc.
The main factor to control the logistics and warehouse is to control your overheads of variable and fixed which organizations can do for cost reduction strategy to sustain their cash flow by considering the following areas:
• Loss of stock
• Distribution cost
• Material Packaging
• Utility cost
The labor cost is subdivided into direct and indirect costs. The Direct cost is the labor who performs operations on the floor and the Indirect cost is the supervisor or management of the warehouse and logistics who supervises the operations. If there is low productivity and loss of stock occurred in the warehouse it means that the labor is not capable enough for this issue, its time to control the cost through labor.
The distribution cost is calculated as the average cost per order and per item, which should be divided customer wise from the top customers which derive 80% of your sales from 20% of your customers. The following points can be considered to reduce the cost.
Size of the order: Managing the size of the order of customers such as try to deliver orders twice or thrice a week instead of delivering regularly, it will save you logistics cost.
Shipping Charges: Another area to control the cost is charging shipping costs to the customer with distribution charges where daily shipping is required.
Service Level: To ensure premium service level to the customer free of cost or charging with high revenue order but is necessary to control the minimum order quantity.
Control on Damages: It is necessary to control damages that cause the sales return which through claims include packaging, item nature, depot, type of damage, etc. This data helps to control goods damage.
Loss of Stock
By calculating the stock loss on a weekly, monthly, and quarterly basis by-product nature or category to measure the percentage of stock loss from overall stock. The categorizing high value and low-value stock with fast running & slow running accordingly, it will also help in control stock loss. It is only possible through a routine physical count of the stock means physical audit to check and address the issues of missing products which exist in the system. Scanning the stock properly according to the system location.
The packaging cost is the important factor in cost reduction technique which helps in reducing cost through effective packaging which results in reducing damages during material handling and transportation from warehouse to customer or manufacturing facility to warehouse.
The criteria used in packaging orders to ship to customers
The necessary information to what to pack and how to pack the goods
Customized packaging of goods according to nature, value, weight, volume, and destination of goods
The durability of packaging for large and bulk orders
Mode of shipping and handling for bulk orders
Overpackaging of orders
Use of cartons, bags, boxes for light and heavy goods
The result of packaging on the destination of goods at customer’s premises
The above factors must be considered in the packaging of goods to avoid unnecessary costs.
Tracking of utility expenses such as electricity, water, material handling devices, etc. is also necessary to measure on a monthly and quarterly basis to avoid unnecessary usage of lights, fans, ventilation, system, any machinery, and other electronic devices such as weighing scales. The percentage of consumption should be monitored as per the ratio of the total cost. Control over utility expenses can give you the edge over competitors in controlling cost.