Tag Archives: cost

About cost……

…. in transport and distribution. In this post I want to discuss about the cost in transport and distribution. It is the most important thing to control this cost, otherwise you can loose a lot of money.
The basic parameter that you must calculate is 
cost per km (mile) or cost per hour (for some machinery or vehicle). I am from Europe and i refer to cost per km because we use km here, but all this principle can be easy transfer  to cost per mile.

When you calculate the cost per km you must can take in consideration as many parameter as you have at the time because when you use more parameter the value become more accurate. I made a web application (http://www.logistic-specialist.com/costpekm/index.php) who may help you to calculate cost per km (unfortunately it is in Romanian language, but i hope to have time to translate it, in the meantime you may use Google translate) and this application take in consideration more than 20 parameters. Also here the rule 20-80 may be apply because only 3 parameter influence 70% of the cost, and this parameter is: fuel cost, drivers salary and maintenance. In this order, fuel may influence between 35 to 65% of the cost per km (depends on the car type and also of the transport activities that you have), driver salary may influence between 20 to 35 % (can be more in certain country and less  in other country) and maintenance between 8 to 17% (can be more or less depends on the conditions).

In my consultancy project i have case where fuel cost is 25% of this cost, but that car is used in small area distribution.

Cost per km is a (let’s say) technical value and it cannot be correlate easy with the other business parameter. In most of the case the management want to transfer this value into other value which can be connected with the products and profitability. They want to have a cost per products or cost per kg (ton) etc.

Cost per kg or cost per ton is easy to calculate if you have cost per km. For example: if you cost per km is 0.4 euro and the car made 400 km with 2,5 ton result a cost per ton: (0.4X400)/2.5 = 65 euro/ton. It is easy, but you must take care because in most of the time the number of km must be the total km of the route.

In some cases cost per ton is not relevant for the business. Cost per ton it is use for products who is sell in ton or kilo (food for example), but if you have computers or television the cost per ton is not relevant, but it is relevant cost per products or per pallet, box etc.

Cost per product it is more complicate to calculate than cost per kg in case of distribution, if you have only one products in the car the calculation is simple, also if you have 2 products the calculation can be simple (if you have products with similar dimension) because you can assimilate percentage of the cost related with the percentage that each products represent from total number of the products. Even if you have 2 products, but with different dimension (for example laptop with washing machine) the calculation become more difficult. Laptop it is small and easy, with similar value like washing machine witch is heavy and larger than laptop and it is very difficult to have some clear criteria how you associate the percentage with the products.

This calculation become more complicate if you have 20 products with different dimension and weight. In this case is easy to calculate an average and consider this value for further calculation.

If you distribute your products to clients the same product do not have the same cost for different client because each client is in other geographical location. In this case it is necessary to calculate cost/product/client or cost/ton/client witch become more complicate to calculate. I will made an example of this calculation in the future posts.

Also it is possible to use average in this case, but in this case (when you use average) you consider that all the client from a route have the same costs and all it is profitable witch is not real all the time: for example a client witch is close by the distribution center will have a smaller cost that a client witch is far from distribution center (close or far means the distance considering the way that you made the route, not the geographical distance). In most of the case the client witch s far from distribution center order small value and in this case that client it is very possible to be unprofitable. If you use average you cannot see unprofitable client and this unprofitable client “eat” profit from profitable client. For my point of view it is very important to identify the unprofitable clients and find war to made them profitable (in most of the case this will involve the sales department). We will discuss in the future posts about the way to made clients profitable.

Warehouse KPI

All the logistic operations must be executed with high performance to have a good cost. For this reason it is necessary to measure these operations and to set up target for performance. For this it is necessary to have KPI (key performance indicators), a KPI which is necessary to be relevant for the business, to be easy to measure and also easy to understand by the people. A good advice it is to choose the relevant KPI for your business, relevant KPI means that KPI which can be easily connected with the global KPI for business. Also I advise you to not use too many KPI, because you lose the essence of the operations if you setup too much KPI. It is not a fix number of KPI for an area, but, according to my experience, if you have more than 5-6 KPI for an area it is necessary to revise this.

Warehouse it is an important area of the logistics and supply chain operations. In these posts I want to define a few KPI which can be used in this area. It is also important when you define a KPI to define the way that this KPI is measure and also the short definition of the KPI.

It the following section I will define some KPI’s for warehouse operations:

-Number of orders prepare per hours – define how many order is prepare per hour;

-Number of orders prepare by a man – define how many orders is prepare by a single man;

-Number of orders prepare by shifts – define the number of order prepare by a shift;

-Value of the safety stock – define the value (in money ) of the safety stock;

-Total space in warehouse;

-Total available space in the warehouse;

-Total value of stock;

-Total value of stock per SKU (Stock Keeping Unit) or Item;

-Total number of warehouses;

-OOS – out of stock – take care of this parameter because can be define in different ways. The best way to define this KPI is correlated with the service level agreement;

-OOS per item or SKU;

-Average time to process an order;

-Tone in per day;

-Tone out per day;

-No of pallets in per period of time VS no of pallets out per period of time;

-No of SKU in per period of time VS no of pallets out per period of time;

-No of full pallets out per period of time;

-No of mixed pallets per period of time;

-Cost for order management;

-Cost per order;

-Cost per order line;

-Cost per order per client;

-No of order line picked per day;

-Cost per order per every warehouse;

-Cost per stored pallet per day;

-Cost with working materials and package;

-Total no of SKU in warehouse;

-Total n of active SKU in warehouse;

-Days of stock per warehouse;

-Days of stock per SKU;

-Inventory costs;

-Picking mistake per man, per period of time, per warehouse etc;

-No of tone moved by a man per period of time;

-Reception time for one pallet;

-Quality of reception (percentage of wrong receptions for total receptions);

-Average time to process a document and to insert it in WMS;

-Average distance for picking per order;

-Cost per man per hour;

-Working hour for machinery (forklifts etc);

-Fuel consumption for machinery;

-Total value maintenance for machinery;


We can define many others KPI’s for warehouse operations. Those are just an example to see how you can measure. Some of those KPI’s is not easy to measure and those KPI have different value for different companies or for different business. Keep in mind that every quantitative KPI’s it must me correlate with a qualitative KPI’s (for example: number of pallets receives per hour can be correlate with quality of pallets reception).

I hope that post can help you and if you like it please share with you friend and colleges.

Simple way to reduce your transport costs

When I am thinking of transport I am thinking about the primary transport, the transport between two hubs or between 2 different warehouses. The secondary transport between the warehouse and the client I call distribution. The transport (and in this post when I say transport I mean primary transport) is usually made with big trucks (20T trucks, 18T trucks etc), and distribution is made with vans or light truck.  The number of delivery points in transport is usually less than 10 (more often less than 5) and in distribution the number of delivery points is higher than 20.
As you already know we measure the distribution costs as a percentage of total revenue (I will write a post in the future about this), and also the transport costs can be measure like a percentage of a total revenue. This percentage can have different values depends on your business and depends on the products that you transport (for example if you transport gold or diamonds the percentage of the transport will be very lower because the value of the goods is very high, but on the other hands if you transport bread or water the percentage of the transport of total revenue is higher because the value of the goods are low) and also depends on the other things. It is not necessary to made transport with big trucks, but the cost per piece or per kilo in lower when the truck is higher. But you must choose the right car for your business. For example the courier service use vans or light truck for transport because is faster that trucks.  The good value of this value can be between 1% and 2% from total revenue.
Which is the ideal in transport? For my point of view the ideal transport is to transport high value products for a short distance, with low volume and low weight and you can fill completely the volume of the car and it is necessary also to transport the highest volume or quantity of these goods in a single transport. This means said, with other words, that it is simple to understand this: is more efficient to transport 33 pallets between Vienna and Budapest than to transport 10 pallets between Vienna and Paris.  This is a simple thing but not all the time is used in practice.
1.    Check all the section of the route and create a minimum accepted load for every section. For example (and I will give example from Romania because I know it best) if you have a route from Bucharest to Cluj with unloading points in Ramnicu Valcea and Sibiu. If you leave Bucharest with 33 pallets, and unload in Ramnicu Valcea 7 and in Sibiu 18, you must to go on the section between Sibiu and Cluj with only 8 pallets. It is efficient to make this section with a car that has capacity of 33 pallets and you have loaded only 8 pallets? For sure not and one of the solution is to change the car with the smallest one to have a minimum 60% load of that car. If you have 30 or 40 cars and in every route you have a section like in my example the efficiency is not very good and you lose a lots of money.
2.    Check carefully the invoice that comes from the transport company. In many cases I saw invoice from the transport company which is higher than normal. This happens because some of the transport company wants to take more money. Some of them find some strategies to put more money on the transport, and if they are smart they will put only 0.1%-0.2% on every route. For example if you have a route for 400Km and they will invoice you 405km this is not a thing that some people consider important. But if they made this all the time (or almost all the time) and if you made annually 4.000.000km, 1% in plus on every route means on yearly bases  40.000 km in plus. With 1 euro per km this means 40.000 euro in plus per year. With this money you can buy a car for one of your directors or for you.
3.    Take care of the extra money that your people can win from Transport Company.   In any company who made transport or rent transport exist “good routes” and “worst routes”. Good route is the rout where the transport companies find very easily a new client after they finish your route. The goods route is what every transport company wants and in this case they will try to have it. How can they do that? Create some advantages for your employee who decides which transport company goes to the route. In this case the transport company will agree to pay extra money for the some of you employee.
4.    Plan, plan, plan every time plan. It is very difficult to have a good price for transport if you do not plan the route in advance or if you do not have a transport plan agree with you transport companies in advance with one week for example. If you do not plan and if you try to find a transport company who have a free car in the next 2 hours it will be very difficult to find one, and if you are lucky and find one, for sure you will have a higher price than normal.
Few years ago I work for a courier company and we have, in every week, at least 2 major car crash. After these events the car cannot be used and it is necessary to replace it. The car has assurance and we take the money from Assurance Company, but we lose money anyway. Why we lose money? Because we take the money from assurance company after 2 or 3 months and we have a financial losses in this case, you cannot replace the crash car in few days because you must order a new one which became available for works in few weeks (it takes time to made order, to made all the documents with leasing companies, to pay etc), and also we lose money because you must to load over capacity remain cars or the rent another car for transport (for this car you pay more than if you have your own car).
We must to do something to solve the problem, and the solution comes after weeks of research and it is: PLAN. We start to plan the activity of the driver, because we see that the most car crash has the same reason: driver and their lack of rest. Because of the route some of the drivers do not have time for enough rest and they become tired and finely they crash the car. After we start to plan the activity of the driver we have only one crash per month in the first period of time and after that we have only 3-4 major car crash on the year.  It is a significant improvement and also reduces the cost per kilometer with more that 30%. This cost savings was happens because we start planning the activities.
I will come back with other posts because I do not finish the subject.

How can I choose a forklift?

To choose a forklift can be an easy job for most of the professional people who work in logistics sector. Actually the thing it is not so easy because on the market it Is a lot of producers and a lot of models and it is not so easy to choose one which is best for you and for you environment, For my point of view you could do this in 2 ways: based on recommendation or based on number and your experience.
First method consist in take some recommendation for some people who work in the past with forklifts and they can recommend you a certain producers and certain models. For that is necessary to talk with some forklifts driver or logistic manager and they you indicate you the forklifts that they consider could be a good one. In most of the case this recommendation is not based on numbers, is based on a subjective criteria that every people have about this subjects.
The second method consists in take this decision based on numbers and technical and financial analysis. For my point of view 3 criteria it is important when you choose a forklift:
1.    Cost per hour – means that how much it cost to work 1 hour with the forklift
2.    Productivity of the forklift;
3.    Space between 2 racks that is necessary to have to be able to work safe with the forklift;
For sure we can define other aspects or criteria that we can take in consideration when we want to buy a forklift, but, for my point of view, this is the most important criteria.  We can take in consideration, for example the rigidity of the forklift mast because a mast which is not so rigid it reduce the working speed when you manipulate the height weight on the high level, but us you see the rigidity of the mast is in direct connection with productivity. Other criteria can be the reliability and the total working life of the forklift, but this is in direct connection with the cost per hour. So, in conclusion, for my point of view, most of the criteria can be reduce of one on this 3.
Cost per hour is the most important criteria for my point of view. Because this is the most important criteria when you choose a forklift you thinks that the producer of the forklift can help you, give the data to take the correct decision. For my point of view, they (the dealer and the producers of the forklift) must do more than that: they must guarantee you in some way for this value (cost per hour) for all the working life of the forklift. If you ask a dealer or producers to guarantee this value (cost per hour) you will have the unpleasant surprise that they will not do that or they will give you a value but they do not guarantee this value. When I said to guarantee this value I mean to have a clear contract where to have this value, for example 1.2 $ per hour and to check this value for a certain period of time, for example 6 months and if this value is higher than 1.2 $ per hour you will pay only 1, 2 $ and the difference will be paid by the producer or dealer.  Also the producers/dealer do not guarantee you the normalize consumption of the forklift and they avoid to give you a value. This parameter it is also important because it is the highest cost (represents between 50-70%) of total cost
If you ask them why they cannot guarantee you a value for cost per hour they will told you that this value depends on how you use the forklift. This is real, but they can put on the forklift monitories device to see how you work with the forklift. I agree to pay more for initial price of the forklift (because it have this device and raise the initial price) because on the working life of forklift I will take this money back for 4-5 times. Using this device they can see if you overload the forklift, if you use it in not proper conditions etc, and also they can have a correct value for cost per hour. Even if they give you a cost per hour you must to have this parameter calculate by yourself using you environmental condition. You must do that because in the initial sales process the sales man will give you the most optimistic value for this parameter because they want to sell the product. If you can compare the value you can have a good image for the beginning.
The second criteria: productivity of the forklift is important because if you use less productivity model you use more forklift to move the same quantity of goods in certain period of time. The productivity depends also by the forklift driver and also by the technical parameter of the forklift.
The third criteria it is important because you can increase the using capacity of the warehouse when you use forklift that use less spaces between racks. You can increase this space with 10-15% if you choose the correct type of forklift. Take care because this kind of forklift (forklift who use less space between racks) is significant expansive than a normal one.
I hope that the article wills clarify some aspects regarding the decision to choose the right forklift.