Assessment of Logistics Costs in Global Logistics Operations PDF

Assessment of logistics costs in global logistics operations Study course “Global Logistics and Transport” Academic year 2024/2025 Lecturer, Agnese Batenko 30.09.2024 1 Previously ▪ Introduction to transportation and transpor...

Assessment of logistics costs in global logistics operations Study course “Global Logistics and Transport” Academic year 2024/2025 Lecturer, Agnese Batenko 30.09.2024 1 Previously ▪ Introduction to transportation and transport networks; ▪ Types of transport networks and transport infrastructure; ▪ Challenges in international transport networks; ▪ Introduction to transportation corridors and their types; ▪ Planning of the transportation route – basic principles. ▪ Practical task. Rīgas Tehniskā universitāte 2 Plan for today ▪ Costs. Classification of the costs. ▪ The most important cost drivers in transport system. ▪ Costs Associated with Transport Cost Drivers. ▪ Practical task. Rīgas Tehniskā universitāte 3 What is the cost? ▪ The value of something that is expended to obtain a benefit; ▪ The quantity of one thing that is exchanged for a service or a product. Rīgas Tehniskā universitāte 4 Definition of costs: types of costs ▪ Monetary or financial cost – the expenses incurred for an input or to provide a product or service, at a given time: ▪ Economic or opportunity cost - the value of benefi ts forgone by using resources to provide alternate products or services; ▪ “Accounting” types of cost - the real value of a product or service at a given time; the cost may actually not be incurred; ▪ “Shadow” prices - applied to goods and services whose true value is not the same as listed. Rīgas Tehniskā universitāte 5 Main categories of costs: ▪ costs related to people and their time (personnel); ▪ costs of equipment or capital (machine); ▪ cost of resources that are frequently replenished (materials and supplies). Rīgas Tehniskā universitāte 6 Costs in logistics In logistics cost analysis, we use two types of costs: fixed (or standing, capital) costs versus variable (or running, operational, recurrent) costs. ▪ Fixed costs are costs that do not vary with quantity or volume of output provided in the short run (typically, one year). These costs usually vary with time. ▪ Variable costs are costs that vary with changes in quantity or output volume. Rīgas Tehniskā universitāte 7 Major Factors That Drive Fixed and Variable Costs Costs drivers - the factors that have an impact on the fixed and variable costs: ▪ the total capacity for distribution in a system; ▪ the total distance to be traveled in the system. N.B!! Capacity refers to to the size and accessability of the vehicles, total distance affects how much distribution vehicles will be used. Rīgas Tehniskā universitāte 8 Major Cost Drivers of Transport System Rīgas Tehniskā universitāte 9 Measures of Major Cost Drivers for Transport Function For capacity: Number of vehicle days. For distance: Total kilometers. Total days to cover distance. Rīgas Tehniskā universitāte 10  Measures of Transport Cost Drivers and Variables That Influence Them: Capacity Distance Number of vehicle-days Total kilometers Total days Costs Order level or volume Frequency Delivey route Rīgas Tehniskā universitāte 11 Capacity: Number of vehicle-days ▪ Types of vehicles or transport mechanisms and the real carrying capacity of a vehicle ▪ Number of vehicle-days type (e.g., cubic meters that can be loaded in each type, adjusting for percentage of ehicle volume that can be used, allowing for loading and unloading space); ▪ Number of vehicles; ▪ Number of days vehicle is available for operation (e.g., in a year), allowing time for vehicle maintenance and major holidays; ▪ Number of hours drivers can operate a vehicle in a given day (typically 8 hours for each 24-hour period); ▪ Number of available drivers; ▪ Percentage of time the vehicle is used for making deliveries or for distribution functions (on average). Rīgas Tehniskā universitāte 12 Distance: Total kilometers ▪ Location of delivery points ▪ Distance to and between the points on the route network ▪ Frequency of trips that need to be made based on the design of the logistics systems (e.g., reorder frequency) and the carrying capacity of the vehicles making the delivery ▪ Other considerations for district/regional boundaries Rīgas Tehniskā universitāte 13 Distance: Total days ▪ Total kilometers to be covered (previous) ▪ Vehicle speed to cover a given distance ▪ Time required for essential logistics or delivery functions to performed while vehicle is on the road (e.g., loading, unloading, inspection of goods delivered) ▪ Other: Number of hours drivers can operate a vehicle in a given day (typically 8 hours for each 24-hour period) Rīgas Tehniskā universitāte 14 Distance: Other variables Order level or volume Frequency Delivery route Type of product Type of inventory control Relative location of ordered/delivered system (e.g., general pull delivery points Number of units of a versus push, forced Type of link between product ordered/delivered ordering, minmax levels delivery points (e.g., Dimensions of packaging set by product or in tarmac or murram roads) form of a unit of product general) Type of delivery Number of deliveries mechanism used (e.g., (e.g., in a year) car, rail, boat, bicycle, etc.) Rīgas Tehniskā universitāte 15 Example of How to Measure Transport Cost Drivers Imagine a hypothetical scenario where a district health department is responsible for quarterly distribution of pharmaceuticals to its 20 health units. The total volume of pharmaceuticals to be distributed to all units in a given cycle totals 30 cubic meters per quarter. The total distance to be covered to reach all sites (assume all health units are reached in one route) is 450 kilometers, on an all tarmac road. The district owns a truck that can carry 2.4 cubic meters when packed to its full capacity, and is operated by only one driver (full-time, working eight hours per day, fi ve days a week). The average vehicle travel speed is 40 kilometer per hour. There are: ▪ 52 weeks per year ▪ eight offi cial holidays per year ▪ about two days for maintenance per calendar month, which is done on working days only. Questions: ▪ What is the total number of vehicle-days available for transport given the following conditions? ▪ What are the total kilometers covered to complete distribution of pharmaceuticals per cycle? ▪ What are the total days required to complete distribution of pharmaceuticals in a cycle? Is one truck sufficient? Rīgas Tehniskā universitāte 16 Answer of an example What is the total number of vehicle-days available for transport given the following conditions? ▪ The answer is 228 vehicle-days per vehicle, per year: ▪ (52 weeks × 5 days per week that the driver can work in a week) − 8 holidays per year − (2 days × 12 months for maintenance) What are the total kilometers covered to complete distribution of pharmaceuticals per cycle? ▪ The answer is 5,850 kilometers: ▪ Given its maximum carrying capacity, the truck needs to make 13 trips to deliver the quantity of pharmaceuticals: 30 m3 / 2.4 m3 carrying capacity = 12.5 (a half trip may still require the truck to be out on the route; to be conservative, 12.5 is rounded up to 13) ▪ The truck covers 450 kilometers on each trip taken on the delivery route; therefore, 13 trips would require the truck to cover 5850 kilometers (or 450 kms × 13 trips). What are the total days required to complete distribution of pharmaceuticals in a cycle? Is one truck sufficient? ▪ The answer is 73.2 days and, yes, one truck is suffi cient. ▪ With a speed of 40 kph, it would take 5,850 / 40 = 146.25 hours to cover the required distance. ▪ Given that the driver can only operate a vehicle for eight hours a day, 146.25 / 8 or 18.3 days per quarter would be required to cover the distance. The total days for the year would be four times that (four quarters) or 73.1 days (18.3 x 4 = 73.2). ▪ Because the vehicle is available for 228 vehicle-days in a year (see above), one truck would be enough to cover the distribution of pharmaceuticals (73.1 days < 228 available days). Rīgas Tehniskā universitāte 17  Costs Associated with Transport Cost Drivers Number of vehicles-days Total kilometers Total days Vehicle depreciation Fuel costs Travel allowance costs Maintenance costs (day per diem) costs Cost of inputs for vehicles (e.g., for drivers and required for placing tires, oil change) packers and maintaining the Night allowance vehicle on the road (night per diem) costs (e.g., licensing, for drivers and insurance, taxes, packers etc.) Salary costs for drivers and packers Costs associated with pooling or parking the vehicle Vehicle leasing or contracting costs, where applicable Fixed costs Variable costs Rīgas Tehniskā universitāte 18 Indirect trsnsportation costs Other personnel salary costs involved in transport function (typically fixed costs): ▪ pickers and packers in the warehouse; ▪ transport managers; ▪ general managers, depending on the extent of time they devote to transport functions. Inventory handling resources: ▪ warehousing and/or building resources (equipment, staff, space, security costs); ▪ information systems devoted to storing and managing the products to be transported/delivered or to scheduling and tracking shipment (including associated personnel costs and communications costs). Rīgas Tehniskā universitāte 19 Example of Measuring and Assessing Costs Associated with Transport Cost Drivers Imagine that the following hypothetical, annual cost information was also available from the district accounting office regarding the vehicle used for pharmaceuticals distribution. In addition, the transport department informed you that the vehicle logged 10,520 kilometers for the year. Also, per diem costs were not considered as a cost factor in this situation. ▪ Vehicle Fuel and Oil Expenses EUR 7 820 ▪ Vehicle Maintenance EUR 3 580 ▪ Vehicle Amortization EUR 4 000 ▪ Vehicle Registration EUR 287 ▪ Road Tax EUR 100 ▪ License Fees EUR 670 ▪ Vehicle Insurance EUR 1 430 ▪ Goods in Transit Insurance EUR 1 800 ▪ Driver’s Salary and Benefits EUR 4 500 Questions: ▪ What is the total fixed cost associated with pharmaceuticals distribution? ▪ What is the variable cost associated with pharmaceuticals distribution? ▪ What are the total pharmaceuticals distribution costs? Rīgas Tehniskā universitāte 20 Answer of an example What is the total fixed cost associated with pharmaceuticals distribution ? ▪ The answer is EUR 4 150. ▪ Given the information above, the total cost of the vehicle is the sum of line items 3 to 9 (i.e., EUR 12 787). ▪ Given that the vehicle is available for 228 days (previous sample), the cost of a vehicle-day is EUR 56.08 (EUR 12 787/228). From previous sample, it was found that 74 (73.1 rounded up) of those days a year would be necessary for pharmaceuticals distribution; therefore, EUR 4 150 (or 74 days x EUR 56.08) of the total cost would be attributable to pharmaceuticals distribution. What is the variable cost associated with pharmaceuticals distribution ? ▪ The answer is EUR 6 318. ▪ Given the information above, total variable costs equal EUR 11 400, or the sum of line items 1 and 2. ▪ In the absence of any additional information to estimate the unit variable costs, the variable cost per kilometer last year was EUR 1.08 (EUR 11 400 / 10 520 kms). From previous sample, 5 850 kilometers needed to be covered to complete pharmaceuticals distribution, with an associated cost of EUR 6 318 (or 5 850 kms × EUR 1.08 per km). Total pharmaceuticals distribution costs would be EUR 10 468 (EUR 4 150 + EUR 6 318). Rīgas Tehniskā universitāte 21 Measuring Costs Associated with Number of Vehicles-Days ▪ There are two inputs for calculating this measure of fixed cost: total vehicle related costs and number of vehicle days. ▪ Information is typically available for all vehicles combined, i.e., for a fleet, but can be determined on a vehicle by vehicle basis and subsequently aggregated. ▪ Costs are quoted on an annual basis. Those costs include: ▪ Depreciation costs (if vehicle is owned); ▪ Costs of placing and maintaining vehicle on the road; ▪ Salary costs ▪ Vehicle pooling costs ▪ Leasing costs (if leased) Rīgas Tehniskā universitāte 22 Measuring Costs Associated with Total Kilometers: Fuel Costs Two approaches are suggested when trying to determine a reasonable estimate of distribution fuel costs. The choice of the approach will depend on the primary objective of the analysis, the type of data available, and the time available to collect and mine it. Estimates based on actual fuel expenditures: calculating a unit cost of fuel per distance (kilometer) traveled using information on actual total costs expended on fuel for the fleet of vehicles and the total distance covered by this fleet, in a corresponding window of time (e.g., a year). ▪ This approach assumes that data is available for the total distances traveled using the vehicles in the fleet. ▪ Unit costs per kilometer can then be calculated by dividing the total fuel costs by the total distance traveled. ▪ The total fuel expenses for distribution activities can then be backed out by multiplying this unit cost by the total distance traveled for distributionrelated activities, obtained from the information on vehicle use. ▪ For vehicles that are used for distribution for only part of their time on the road, the total distance traveled by the vehicle could be prorated in proportion to the time they were used for distribution. Estimates based on average fuel running costs (hypothetical approach): an estimated unit cost of fuel per kilometer can be calculated and used to estimate the total cost of fuel for the distance traveled for distribution activities ▪ Calculation: Average cost of fuel per liter ÷ Average kilometers covered per liter ▪ As above, this unit cost of fuel is multiplied by the total distance traveled for distribution-related activities, obtained from estimates based on the distances in delivery routes and frequency of deliveries and/or trips required. Rīgas Tehniskā universitāte 23 Measuring Costs Associated with Total Kilometers: Vehicle maintenance costs Vehicle maintenance includes activities like oil changes, tires changes, etc. The longer a vehicle is on the road, the greater the need to ensure proper maintenance and the higher the related maintenance expenses. Two measurement approaches: ▪ Using information on actual maintenance expenses: Similar to the approach for estimating fuel costs in this way, this approach requires an estimate of the actual costs spent on maintenance-related costs. ▪ To obtain a unit cost per kilometer of maintenancerelated costs, this figure is divided by the total distance traveled by vehicles that received maintenance. ▪ To determine the total maintenance costs, the unit cost is then multiplied by the relevant distance traveled for distribution costs. ▪ Estimates based on expected or typical maintenance costs (hypothetical): This approach relies on being able to calculate a unit cost per kilometer for maintenance inputs based on an accepted or reasonably defi ned maintenance protocol per vehicle type. ▪ To derive the unit cost per kilometer— Average cost of oil or tire change ÷ Average number kilometers covered between oil or tire changes ▪ For tire changes, more than one tire may need to be changed within a certain travel distance; the average cost estimate for a tire change in the formula should, therefore, include the cost of changing all the affected tires. To estimate the total cost of kilometers, the estimated cost pekilometer is multiplied by the total distance (to be) traveled in the distribution system. Rīgas Tehniskā universitāte 24 Measuring Costs Associated with Total Days: Travel Allowance ▪ The recommended and simplest approach for estimating the running cost of total days overnight required for distribution is to use an estimate of allowance costs per day. This unit cost allowances is then multiplied by the number of people who are involved in distribution activities and per diem) are eligible to receive an allowance, and by the total number of days required to complete costs the distribution. ▪ A distinction can be made between total number of days without overnight stay and those requiring an overnight (e.g., owing to the nature of the delivery route). The latter typically requires a higher allowance rate per person. ▪ Note also that different personnel (e.g., the driver versus the person who travels with the driver but is responsible for unloading the vehicle at a delivery point) involved in distribution may be eligible for different allowance rates. These differences can/should be taken into account when calculating total cost of allowances. Rīgas Tehniskā universitāte 25 A freight exchange or load board ▪ A freight exchange is an online marketplace where shippers and carriers can connect to find freight opportunities. ▪ Freight exchanges offer a platform for shippers to post available loads, and carriers can bid on those loads. ▪ The platform provides a centralized location for shippers to find carriers and carriers to find loads. ▪ Freight exchanges are designed to simplify the logistics process, reduce transportation costs, and improve the efficiency of the supply chain. Rīgas Tehniskā universitāte 26 Tasks of freight exchange ▪ Providing a platform for shippers and carriers to connect ▪ Offering real-time information on available loads and carriers ▪ Providing tools to help shippers and carriers manage their operations ▪ Streamlining communication between shippers and carriers ▪ Facilitating transactions between shippers and carriers Rīgas Tehniskā universitāte 27 Freight exchange platforms: examples ▪ 123 Cargo; ▪ CargoCore; ▪ Euro Freight Exchange; ▪ Euroloads.net; ▪ Express-online; ▪ Haulage Exchange; ▪ …..etc. Rīgas Tehniskā universitāte 28 Practical task ▪ In groups up to 5 people; ▪ Read the scenario provided and annual cost information and provide an answer to the questions showing calculations, preferably in the form of the table. Rīgas Tehniskā universitāte 29 Next lecture October 7, 2024 Kalnciema street 6 - 223. Topic: Global Purchasing Strategy in Logistics. Independent work I Lecture starts @18:15 30  Assessment of logistics costs in global logistics operations Study course “Global Logistics and Transport” Academic year 2024/2025 Lecturer, Agnese Batenko 30.09.2024 31