Logistics Costs: 6 Types and How to Manage Them

Logistics management can be a challenge for any business. If you're not careful, logistics costs can pile up quickly and eat into your profits.

When it comes to logistics costs, we're referring to any expenses your business faces regarding product flow and storage. 

These costs include everything from sourcing and storing raw materials in a warehouse to shipping and delivering those goods to customers. 

Managing these costs lets you increase profitability, improve customer satisfaction, and save money along the way. 

In this article, we’ll explain various logistics costs, share strategies for managing them, and give a few real-world examples, so you can see how handling these costs can benefit your business.

Key takeaways:

• High logistics costs can negatively impact your profitability, making it crucial to find ways to manage them.
• Logistics expenses include total costs associated with the flow and storage of finished goods, including transportation, inventory storage, and labor costs.
• Your business can achieve greater efficiency and reduce costs by optimizing supply chain management and logistics processes through automation and streamlining operations.

1. Transportation costs

Transportation costs include all business expenses related to inbound and outbound transportation of raw materials, manufactured products, and personnel.

It's not just about shipping products — transportation costs also include business trips, field services, and last-mile delivery.

These expenses can quickly add up and impact your bottom line.

For instance, fuel, storage fees, and vehicle maintenance costs are just some costs to consider. 

Mismanaging costs can spell trouble for your business. 

For instance, you'll make less profit if producing a product costs more than what you charge customers for the product. 

Plus, you might have to hike up prices if you can't keep costs down just to stay afloat. 

This can give competitors an edge and leave you struggling to keep up. 

Fortunately, there are ways to manage these costs effectively.

How to manage transportation costs 

When it comes to managing transportation costs, optimizing your delivery routes to save on fuel is a great place to start. 

That's where Circuit for Teams comes in.

We have a powerful tool that makes it super easy for you to choose the fastest routes possible.

You can prioritize stops, give special driver instructions or notes, and even set delivery time windows for each stop to avoid missed deliveries. 

These cool features let you save precious time and cut down on pesky fuel costs.

Another tip is to consider sea freight or trucking transportation instead of air when shipping materials, as these are often more cost-effective options. 

And if you want to improve shipping times, it might be worth considering moving your distribution center closer to your main customer base. 

This can help you fulfill orders quicker and, ultimately, enhance customer satisfaction.

Check out two companies that did a great job handling their transportation expenses:

• Plant Ship managed a 566 percent increase in weekly deliveries. This company achieved some impressive results by optimizing its delivery process. Plant Ship managed to cut down on the time it took to plan routes and make more customer deliveries. This saved money on fuel costs and helped improve the company’s bottom line.
• Bobcaygeon Brewing Company managed to significantly reduce route planning time. Implementing route optimization and automatic order status updates helped this business save time and money. This eliminated the need for manual route planning and updating customers via phone, freeing up valuable hours for other business tasks.

2. Shipping costs

There’s more to shipping costs than just delivery fees. 

You've got packaging materials like boxes, tape, and stickers to consider, as well as labor costs and import and export fees for international shipping.

These shipping expenditures can quickly add up, reducing your profit margins.

That's why optimizing your shipping processes to save money and make sure your products arrive at their destination safely and on time is important.

How to manage shipping costs 

One strategy for managing shipping costs is to use our tool Circuit for Teams for route optimization. 

Your business can reduce fuel costs and improve delivery efficiency by optimizing delivery routes, lowering the overall shipping costs of goods.

You may also consider consolidating shipments and utilizing less expensive modes of transportation.

Transportation options like trucks, trains, or cargo ships are typically less costly than air shipping.

Additionally, optimizing warehouse operations can reduce the need for expedited shipping.

Essentially, keeping a close eye on what products you have in stock and arranging them in an orderly fashion can help you fulfill orders more efficiently. 

Alphabet Brewing Company is a great example of a business that has managed to optimize its shipping processes. 

The company used Circuit for Teams to streamline their routes, saving them precious time and money to allocate to other business processes.

3. Warehousing costs

Having a warehouse to store inventory is essential for most businesses, especially those with an eCommerce focus. 

However, warehousing is one of a business’s biggest logistics costs.

Warehouse expenses include rental costs, utility fees, storage expenses, and administrative costs (such as labor and general office materials).

To put this into perspective, let’s say warehousing expenses cost you around $8 per square foot. That means renting a 10,000-square-foot warehouse could set you back a whopping $80,000 a year!

And that price tag doesn't even cover storage fees for pallets and other equipment.

It's not just about having a physical space to store your inventory — it's also about managing it efficiently. 

Poor warehouse management systems can lead to excess inventory taking up space and adding to your storage fees.

So, optimizing your warehouse operations is key to reducing logistics costs. 

How to manage warehousing costs 

One way to manage your warehousing costs is by utilizing technology like barcode scanning systems and inventory software to manage demand. 

This can help track your inventory levels to avoid overstocking. 

Additionally, regularly auditing your inventory metrics can help identify slow-moving or obsolete items you can sell off or donate to reduce storage costs.

Another option is incorporating shelving to maximize the available space, or minimizing the warehouse space to reduce storage fees.

Let me give you an example of how this works in the real world. Take Henkel, for instance. 

Henkel is a company that sells adhesives, sealants, and other chemical goods. 

Like many businesses, Henkel was struggling with warehouse operations. 

The company was using time-consuming, outdated, and error-prone manual procedures that were costing them valuable time and money.

Luckily, the company took action and implemented better inventory visibility and standardized processes.

And you know what? It made a huge difference. 

Henkel reduced the time it took to store and pick inventory, ultimately improving warehouse efficiency and productivity.

4. Inventory costs

Inventory is a crucial aspect of any business that sells products, whether a brick-and-mortar store or an eCommerce company. 

Unfortunately, inventory costs can quickly add up and significantly impact logistics.

First are the sourcing and procurement costs, including the time and resources to research, negotiate, and establish supplier relationships.

Next are inventory purchasing costs, or those related to buying your products.

Plus, you must consider shipping expenses like transportation and handling fees when moving inventory from suppliers to your business's warehouse or store.

Thankfully, there are ways to handle these expenses. 

How to manage inventory costs 

You can minimize excess stock by monitoring inventory levels and optimizing order quantities.

Importantly, investing in inventory management software can streamline the process, giving you real-time visibility into your stock levels. This can help you make data-driven decisions. 

A well-managed inventory system can help you increase efficiency, reduce waste, and save money on logistics.

Let’s look at Bombay Hemp Company, for example. With a plethora of product offerings, the brand was finding it difficult to manage inventory. 

The company implemented inventory management software to forecast demand, consolidate products, and streamline the supplier network. 

This reduced excess inventory and lowered the company’s logistics costs significantly.

5. Packaging costs

Packaging is a big part of your business. It's what catches your customer's eye and tells them about your product’s quality. 

However, with all that beautiful packaging comes a great cost, including labor, raw materials, design work, prototypes, and inserts. 

So, finding the right balance between attractive packaging and cost-effectiveness is essential. 

How to manage packaging costs 

Here are a few ways to consider managing the variable costs associated with packaging: 

1. Reduce packaging material. Your business can redesign packaging to reduce the size or use eco-friendly materials that cost less.
2. Use automated packaging equipment. Automating the packaging process can help reduce waste, lower labor costs, and improve efficiency.
3. Purchase materials in bulk. By partnering with suppliers, you can negotiate better pricing and purchase packaging materials in large volumes.

Check out what discount supermarket ALDI has been up to! 

This company managed to streamline packaging costs and is on track to reduce packaging materials by 15 percent. 

ALDI optimized its packaging designs and sourced eco-friendly materials like recycled content and compostable packaging. 

By taking these steps, ALDI saved time and resources and reduced expenses. 

6. Labor costs

Running a business is no easy feat. It's understandable that you may need to hire employees to help you with daily logistics operations. 

Labor expenses include the sum of all costs paid to your employees. 

In terms of logistics expenses, this includes salaries and benefits for warehouse workers, in-house delivery drivers, inventory managers, and any other staff involved in moving and handling your goods.

To keep these costs under control, it's important to clearly understand your labor expenses and where your money is going.

How to manage labor costs 

You can start by reviewing your payroll records and identifying areas where you may be overspending. 

For example, consider automating or outsourcing tasks to a third-party logistics company to reduce the need for additional staff.

Another strategy is to invest in employee training and development to help your staff work more efficiently and effectively.

Training can lead to increased productivity and better results, which can help you save money on labor costs over time.

You can also think about streamlining delivery and inventory management processes to save time and money. 

These companies saved on labor costs by improving their delivery processes:

• Applied Data Technologies saves 8+ hours per week in payroll. By using Circuit for Teams to automate delivery routes, this company saves on labor costs by freeing up time to concentrate on other business areas.
• Burd Eggs saves over 30 hours per week by optimizing delivery routes. Circuit for Teams helps this company manage its team of drivers effectively, not only helping them take the fastest routes but also saving time in route planning. Plus, it helps drivers complete their deliveries faster, freeing them up for other tasks.

Get a free trial of Circuit for Teams to save time and money

Properly managing transportation, warehousing, and other logistics costs can increase profitability, all while saving you time and money.

That’s what Circuit for Teams is all about. 

It’s the ultimate tool to optimize your delivery routes and save on fuel costs, reduce vehicle wear and tear, decrease overall delivery time, and avoid late deliveries.

This helps you save on transportation costs, shipping fees, and labor expenses.

In addition to route optimization, Circuit for Teams also gives real-time delivery tracking and status updates to help you keep your customers informed about their deliveries. 

This can boost customer satisfaction, resulting in increased sales and revenue. 

Sign up for a Circuit for Teams free trial to efficiently manage your logistics, achieve better business outcomes, and stay ahead of the competition.