LOGISTICS COSTS – A MANAGEMENT VIEW

One of the main challenges of modern logistics is managing the relationship between cost and service level (trade-off). The biggest obstacle is that more and more customers are demanding better levels of service, but at the same time, they are not willing to pay more for it. Price is becoming a qualifier, and the level of service a differentiator in the market. Thus, logistics gains the responsibility of adding value to the product through the service it offers. Among these requirements for service, we could highlight:

• the reduction of the delivery period;
• greater availability of products;
• time-definite delivery;
• greater compliance with delivery deadlines;
• the greatest ease of placing the order.

The importance of each dimension of the service also varies according to the profile of each client, since their needs are different. In this way, companies, in order to maintain their competitiveness, are segmenting their service and distribution channels (see figure 1 – differentiation of channels). Faced with this sophistication of the logistics structure, a big question arises: What is the impact of improving the level of service on the company's costs? And what is the effect on your profitability?

There is no doubt that the problems that affect profitability get worse when we are slow to notice them and when we are unaware of their causes. In this way, the effort must be directed towards identifying them as early as possible and thus solving them before they become critical. Faced with this need, cost management systems become a key element for companies. This article aims to provide a managerial view of logistics costs, considering the development of tools and dealing with their potential, as well as exploring the ABC (activity based costing) methodology.

THE COSTING INFORMATION

As already mentioned, more and more companies are segmenting their service in order to improve the level of service in the direction of their customers' needs. In extreme cases, systems are developed to serve specific customers. In this race for differentiation, companies often end up facing the following question: Are all customers profitable for the organization? However, executives often need to answer this question with only aggregated data on transport costs, storage, inventory, etc. At this point, without much choice, they end up answering: on average, my customers give me desirable profitability. However, in this way one customer may be subsidizing another and in the long term the company's profitability may be threatened (see figure 2 - distribution of customers by profitability range).

The poor quality of cost information can bring a series of distortions in the decision-making process. Usually, information from the company's accounting is used for management purposes. However, the fact that these are directed towards a mainly fiscal objective and with a focus on production, can harm, or even make unfeasible, some managerial analyses. Among the main criticisms of the use of accounting information for management purposes, we can mention:

• the cost apportionment criteria used;
• failure to consider the opportunity cost;
• the legal depreciation criteria.

Another evidence of the lack of compromise between accounting data and logistical costs are the account plans. For example: supply transportation costs make up the cost of the product sold, as if they were material costs; distribution costs appear as selling expenses and other costs appear as administrative expenses. In this way, no information regarding logistical activities is shown.

LOGISTICS COSTS MANAGEMENT

The lack of cost information that is useful for the decision-making process and the control of activities makes it necessary to develop management tools with specific objectives. These objectives can be traced from two basic questions:

• What type of analysis do you want: short-term or long-term? (the basic difference in this case refers to the possibility or not of changing the capacity, only possible in the long term)
• What do you intend to pay for: products, distribution channels, service regions, customers?

Although the definition of objectives is necessary, the same system can be developed to serve different purposes. Furthermore, these tools can be implemented with different degrees of sophistication, using appropriate systems, or using electronic spreadsheets, such as Excel. The most important is the knowledge of the decision maker about the available information. It is necessary to know what is being considered in the model and to know its limitations.

Logistic cost management can be more or less focused according to the desired objective. In this way, it is possible to develop a system to serve only one activity, a set of activities, or even all logistical activities of the company. However, it's important to realize that increasing scope can have repercussions on a lack of focus. Hence the need to direct the system towards the type of control or decision that is intended to be supported.

The cost management system can extrapolate the company's limits, also considering other activities carried out by other components of the supply chain. In the case of outsourced services, this management can be even more important. For example, it is common for large companies to work with more than one carrier, remunerated according to transport costs. However, frequently these costs are not properly calculated, either because of the lack of an adequate conceptual structure, or because of the quality of the parameters used. In this way, there are often more or less profitable routes, which ends up creating an impasse in the allocation of routes among carriers, since everyone wants to operate on the most profitable routes. A simple freight cost tool, as long as it has well-calibrated parameters, would already solve this problem.

Next, some of the potentialities of cost management in the three macro logistics processes will be illustrated: supply, manufacturing support and physical distribution.

In supply, a costing tool can help in the selection of suppliers, in the definition of the sizes of purchase lots and in the determination of the inventory policy. In the past, the purchasing function was evaluated according to the purchase price of inputs. Thus, their concern was focused on obtaining the lowest price, and the service provided by these suppliers was placed in the background. In this way, companies were often forced to work with a high level of inventory of materials, in order to guarantee the supply of the production line in the face of the risk of non-availability, delays, or returns of these materials. The price bargaining policy itself, based on lot size, was already hindering the efficiency of the production process.

Today, there is a conceptual transformation in this process, since the purchase price is seen only as one of the acquisition costs, which considers the costs of placing the order, transport, receipt and stock of materials. In this way, it is possible to identify suppliers that, even though they are not leaders in price, are able to offer a product at a lower cost, by offering a system with a higher frequency of deliveries, with high availability of products and a lower rate of returns.

In production – even with traditional costing being geared towards this activity, it only measures the cost of products compared to what was produced in a period of time. Even so, it allocates indirect costs to products in a distorted way, over-costing high-volume products and under-costing low-volume ones. For logistics, the production cost tool must be focused on the needs of production planning and control, in order to support decisions regarding batch sizes and production allocation between plants and production lines.

For this, the system must allow the simulation of different production policies to understand how costs behave in the face of these changes. In addition, this system must allocate indirect costs in a non-distorted way so that products can be funded and thus measure the profitability not only of products, but also of customers.

To illustrate the role of these systems, let's see what happened to a large national company producing non-durable consumer goods, which was a leader in its market sector.

Its competitive advantage was based on economy of scale, given by its high production volume. Seeking to maintain market leadership, the company began to increase the variety of products. As this company did not have an effective costing system, costs were allocated according to production volume, so that high-volume products subsidized low-volume products. As a result of the increase in costs, prices were gradually readjusted.

The problem is that its biggest customer, who consumed a small variety of items, started to pay the cost of the wide variety. As a result, this client decided to change suppliers, looking for someone highly focused, able to offer a more competitive price. The loss of this important client caused the company to lose scale, increasing its costs even more, which led it to review its cost system and its pricing policy in order to remain in the market.

In physical distribution, a system covering all activities from leaving the production line to delivery can be developed. The important thing in this type of system is to be able to track costs through the logistic structure, avoiding the indiscriminate apportionment of costs. Thus, it is possible to measure the costs of distribution channels for customers and even deliveries.

This information is essential for profitability analyses, which in turn should be used by the commercial area personnel in the customer portfolio segmentation process. In this way, the level of service can be established not only according to the needs of the customers, but also according to the profitability that these provide for the organization.

A benchmarking company in physical distribution in Brazil developed a pilot system, which makes it possible to observe how service costs – sales, order processing, inventory, storage and delivery – vary depending on the geographic region, the service channel and also on the basis of the size of the order. In this way, it was possible to establish minimum delivery volumes for each region and service channel. This tool also made it possible to observe that part of the customers served by a differentiated system were often not profitable for the company. In addition, it allowed selecting which customers should be served directly and which should be served through distributors.

The relevance of an activity in the logistics process and its need for control can lead to the development of a cost tool focused on a specific function. In the case of physical distribution, transport is often highlighted, especially when it is necessary to remunerate transporters and charge the customer's account.

Other important cost considerations include: pricing, scenario simulation, and cost control.

Prices are not formed based directly on costs, however, costs always influence price formation, especially in the long run. In the case of more stable commercial relationships and partnerships, costs have a greater influence on price formation. The most characteristic case of cost-based pricing is delivery freight.

Another advantage of costing tools is to allow the simulation of different scenarios. For example, what is the impact on distribution cost through:

• closure of a distribution center?
• variation in the price of a certain input?
• increase the productivity of a certain activity?

In this way, through simulations it is possible to improve the decision-making process, as well as to develop budget plans.

The costing system can also play a controlling role. Problems such as low asset utilization, which can affect the profitability of companies, can be identified by this type of tool. In the case of a delivery transport, for example, the queue time for loading and unloading, when exaggerated, causes low vehicle utilization, thus affecting profitability.

It is worth mentioning that the cost system alone will not reduce any type of cost, but it can identify reduction opportunities. In this example, the opportunity would be to reduce the queue time, and therefore reduce the size of the fleet, which would in fact be the action responsible for reducing costs.

As noted, the great difficulty of funding logistical activities is linked to the high proportion of indirect costs and the great segmentation of products and services. The activity-based costing philosophy, ABC (Activity Based Costing), is an alternative that has proven to be efficient in the face of these needs.

ABC originated in the USA, in 1984, with the basic objective of providing a vision of costs that was more focused on managerial needs. Its implementation can be laborious due to the need to map activities and collect data, but its operation is relatively simple. The ABC system (see figure 3 – ABC methodology), in a first stage allocates resource costs to activities, and in a second stage allocates activity costs to cost objects (products, customers, channels, etc.).

A primary advantage of this system is that it has a vision of processes and is oriented towards the company's activities. Among other advantages of ABC, it can be highlighted:

• The allocation of indirect costs and overhead expenses more judiciously, avoiding cross-subsidy costs.
• Provides activity-oriented control and monitoring, allowing for more efficient management of company processes.
• They have the flexibility to work with different cost objects, allowing the measurement of the costs of products, services, distribution channels, customers, etc.

In addition to the advantages already mentioned, ABC applied to logistics activities allows the system to be extended throughout the entire supply chain, enabling the dissemination of these benefits to all companies that comprise it. In this case, ABC would also be a facilitator to minimize the Total Cost of the Supply Chain, not analyzing costs in a fragmented way by company.

In Brazil, the ABC system has been applied in a number of companies, but there are few applications focused on logistics activities.

In contrast to this trend, the ECR Brasil movement created a subcommittee in which 18 companies from the industry and retail sectors participate, whose first results were presented at the ECR Brasil Congress, held last November. In one of the sections of the congress, a pilot project carried out by the companies Sonae/Cândida, Coca-Cola/Panamco-Spal and Copersucar-União was presented. This pilot project was based on the ABC methodology and considers the process from leaving the production line to making products available on retailers' shelves. This could be the beginning of an awareness of the importance of the topic for companies operating in Brazil.