102 Scientific Journal of Maritime Research 33 (2019) 102-109 © Faculty of Maritime Studies Rijeka, 2019

Multidisciplinary Multidisciplinarni
SCIENTIFIC JOURNAL znanstveni časopis
OF MARITIME RESEARCH POMORSTVO

https://doi.org/10.31217/p.33.1.11

An Overview of the Problematic Issues in Logistics Cost

Management
Robert Muha
University of Ljubljana, Faculty of Maritime Studies and Transport, Pot pomorščakov 4, 6320 Portorož, Slovenia, e-mail: robert.muha@fpp.uni-lj.si

ABSTRACT A RT I C L E I N F O

Logistics cost management is associated with certain specific challenges, since increasing the quality Review article
of logistics services for customers often comes with increased logistics costs. In addition, reducing Received 15 April 2019
the costs of one logistic component causes an increase in the costs of another logistic component, Accepted 3 June 2019
which results in higher total logistics costs. Various cost models have been developed to support the
optimisation of logistics activities, which represent the main focus of research and a key practical Key words:
tool for logistics management. The purpose of the study is therefore to determine whether current Logistics
scientific studies are addressing the issues related to logistics cost management. The aim of the study Logistics costs
is to determine the scope of the optimisation of individual logistics models from the point of view Logistics processes
of how individual logistics costs categories and processes are treated. The analysis of logistics costs Logistics management
management issues provides an important empirical foundation for the improvement of logistic Models
processes in supply chains and synthesises scientific literature in the field of logistics cost modelling,
which represents an important framework for future empirical studies.

1 Introduction tic processes [14, 18]. A higher level of service in logistics

potentially leads to greater customer (buyer) satisfaction,
Logistics costs account for most of the costs in the supply but at the same time, it leads to higher costs. This results
chain of a company and also cover a significant share in the in the necessity to achieve a balance between the qual-
overall cost structure of the company. There are major differ- ity of logistics services and the level of logistics costs.
ences in logistics costs among companies in different indus- The next key factor relates to the difficulty of measuring
tries, however, several scientific studies [11, 26, 35] state that logistic costs, as they are present in various business ar-
their share in the company’s sales revenue is at least six per- eas, such as sales, purchasing, manufacture and logistics.
cent. The sales revenue percentage varies widely among the However, logistics processes should be measured in order
studies and ranges from 6% to 25% [36]. The complexity of to ensure that they are controlled effectively.
logistics costs management is a result of several key factors In the last thirty years, various cost models have been
that are present both in theory and practice. When managing developed to support the optimisation of logistics activi-
the costs of logistics, we must bear in mind that reducing one ties, which represent the main focus of research and a key
group of logistics costs can result in an increase in another practical tool for logistics management. The purpose of
group, which is reflected in the increase in the company’s the study is therefore to determine whether current scien-
overall logistics costs and the reduction in profitability. tific studies are addressing the issues related to logistics
Awareness of the interdependence of logistics costs cost management. The aim of the study is to determine
and of the impact of the level of quality of logistics serv- the scope of the optimisation of individual logistics mod-
ices on the overall logistics costs represents one of the els from the point of view of how individual logistics costs
next aspects of planning high-quality and efficient logis- and processes are treated.
R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109 103

An overview and analysis of logistics cost management Logistics costs result from activities that support the
issues provides important empirical support for improv- company’s logistic process. Various authors [11, 38, 40]
ing logistic processes in supply chains. The presented classify logistics costs as a percentage of the revenues from
study also provides a synthesis of the scientific literature the sale of goods and identify at least six individual cost
in the field of logistics cost modelling, which represents an components such as transport, warehousing, stock man-
important framework for future empirical studies. agement, administration, packaging and indirect logistics
costs. Ojala et al. [22] make a distinction between direct
2 Literature Review - The Specific Challenges of logistics costs (transport and warehousing costs) and indi-
Logistics Costs Management rect logistics costs (stocks costs and administration costs).
Stock and Lambert [32] provide a more detailed definition
Logistics costs and supply chain costs are industry terms of logistics costs that covers an even greater share of the
that are often used as synonyms in theory and in practice, costs of the supply chain, as they include order process-
which leads to some confusion when defining these terms, ing costs and lot quantity costs. Regardless of the different
as there are obvious differences when it comes to explain- definitions of logistics costs, studies are limited to meas-
ing their role in the business process of a company. Logistics uring transport costs, warehousing costs, stocks costs,
costs are usually defined as cost components that are con- administration costs and other logistics costs. In these
nected to the distribution of goods and costs related to the measurements, transport costs are at the forefront, as they
warehouse, which is reflected in the definition of logistics represent the largest share in the structure of the logistics
according to Lambert et al. [16]. Bowersox and Closs [8] de- costs of a company. In these studies, individual logistics
fine supply chain costs as cost components that are directly costs have the following share in terms of sales revenues
related to order handling, purchasing and stock handling. [11, 22]: transport costs (from 4.08% to 5.3%), stocks
Byrne and Heavey [9] add manufacturing costs to supply costs (from 1.79% to 5.7%), warehousing costs (from
chain costs, giving supply chain costs a wider definition, 1.75% to 3%), administration costs (from 0.23% to 1.5%)
compared to logistics costs. Figure 1 shows the supply chain and other logistics costs (from 0.33% to 1.1%).
costs of a company, in which logistics costs play an impor- Logistics costs management has a significant impact on
tant role. In the supply chain, only manufacturing costs, in- a company’s operations. Companies that lack awareness
stallation costs and partially capital costs do not fall within of the importance of reducing logistics costs do not have
the definition of logistics costs. a clear perception of how these costs affect their perform-

Figure 1 Supply chain costs of a company

Source: [25]
104 R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109

Table 1 Impact on profits by reducing logistics costs ance and profits. Table 1 shows that an increase in sales by
€1 does not automatically result in an increase in profits
If net sales profit is 2.0%: by €1. If, for example, a company’s profit margin before
Savings from: Resulting sales increase: taxes is 2% (sales revenue minus costs), the company re-
EUR EUR ceives only €0.02 of pre-tax profit from each euro sold.
0.02 1.00
  Each euro saved in the logistics process does not auto-
2.00 100.00 matically mean an increase in sales or a reduction in other
200.00 10,000.00 costs. Nonetheless, each euro saved in logistics costs does
mean increased profits. A reduction in logistics costs has a
2,000.00 100,000.00 greater impact than an increased sales volume [32].
20,000.00 1,000,000.00 When managing logistics costs, we must bear in mind
that reducing one group of logistics costs can result in an
200,000.00 10,000,000.00
increase in another group of logistics costs, which is re-
2,000,000.00 100,000,000.00 flected in the increase in the company’s overall logistics
Source: [32]
costs and the reduction in profitability. Awareness of the
interdependence of logistics costs and of the impact of the
level of quality of logistics services on the overall logis-
tics costs represents one of the most important aspects of
planning high-quality and efficient logistic processes [38].
Transport costs, warehousing costs and stocks costs rep-
resent the main share of the costs in the structure of logistics
costs, which is why they are interdependent in various situa-
tions, as illustrated in the case of deciding on the number of
warehouses needed for the purpose of servicing the logistics
process of a company. Figure 2 shows an example when one
warehouse is replaced by four warehouses; one warehouse
covers 16 km², while four warehouses on the same surface
each cover 4 km², therefore the way to the centre of the four
squares is shorter, which means that transport costs are re-
duced. On the other hand, the operating costs for the four
warehouses are higher, because each warehouse requires
a certain number of people. In addition, the total inventory
level is increased, as minimum and/or safety stock quanti-
ties are set for each additional warehouse [18].
Figure 2 Comparison of transport distances with respect to the number Figure 3 shows that transport costs decrease as the
of warehouses. Source: [18] number of warehouse locations increases. At a later point,

Figure 3 The ratio between total logistic costs and the number of warehouses. Source: [16]
R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109 105

the transport costs curve moves upwards due to poor co- of the customers in order to improve the level of services
ordination of inbound and outbound supplies between [32]. Logistics processes must be measured in order to en-
warehouse locations [16]. It is therefore important to able us to control them. Measuring the impact of logistics
calculate the number of warehouses that would result in activities is the key to reducing inefficiencies in a com-
levelling both groups of logistics cots and thus in reducing pany’s system, while at the same time increasing its op-
the total costs of logistics as much as possible. portunities for growth. Effective measurement of logistics
The level of quality of the logistics service has a ma- activities enables the achievement of the following objec-
jor impact on the level of logistics costs. Therefore, when tives [3]:
planning logistics processes, an appropriate level of cus- • improving profitability by reducing operational and
tomer service should be planned. A higher level of service administrative costs,
in logistics potentially leads to greater customer (buyer) • improving profitability by assessing the value of indi-
satisfaction, but at the same time results in higher costs. vidual activities in relation to customers and suppliers,
This results in the necessity to achieve a balance between • increasing revenue growth by providing an appropri-
the quality of logistics services and the level of logistics ate level of service to the customer, while at the same
costs. The location of the ideal point is extremely difficult time maintaining customer satisfaction,
to determine, because this ratio is marked by a set of com- • identifying or discovering different products and serv-
plex and interconnected logistics factors. One possible so- ices that enable improvement of the level of service
lution is to control costs by finding the balance between to the customer, as well as the potential for revenue
the elements of logistics, where Logožar [18] emphasises opportunities,
balancing. In these activities, different conflicting costs • determining which operations should be improved.
and other elements of logistics are compared, and those Cost measurement or estimation is not a simple proc-
that show the lowest overall logistics costs in a given ra- ess, so it is usually performed by experienced experts.
tio are selected. Conflicts can also arise between costs at Measurement problems arise because assumptions are of-
the logistics service level and the costs of customer loss. ten used instead of actual data, which points to the need
If the speed of supply increases, the costs increase, and if for cost modelling [28]. Logistics costs arise in different
this level decreases, costs are also reduced, which can re- business areas, which is why their location in the proc-
sult in loss of customers. In this case, it is also necessary to ess of providing a service or making a product becomes
reduce the level of service to the point where the custom- unclear, and why the need for assessing and estimating
ers are still retained. logistics costs from the initial phase of product develop-
For the purpose of achieving the highest efficiency of ment to the completion of after-sales activities is even
logistics, each component of the logistics system should more evident. Figure 4 shows a cost estimation study in
operate at the highest level. Measuring the logistics proc- the automotive industry where several issues can be iden-
ess is important from the point of view of the company in tified that prove the difficulty of measuring logistic costs.
order to reduce logistics costs and from the point of view Discrepancies occur in the order in which logistics costs

Figure 4 An example of the product cost estimation process in the automotive industry
Source: [28]
106 R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109

are estimated, as they are placed at the end (before calcu- tific papers were analysed, of which 23 have an impact fac-
lating all product costs). Logistics costs estimation should tor and are cited in the JCR (Journal Citation Reports).
be done in several stages, namely, after the estimation of
manufacturing costs (Phase 1), before estimating the total
4 Results
cost of the product (Phase 2) and after the supply of the
products (Phase 3), which would make it easier to deter- The scientific papers introduce individual logistics
mine the discrepancies or inefficiencies in the process of costs models. Therefore, the purpose of the analysis is to
purchasing goods, manufacturing, sales and after-sales ac- determine the scope of the optimisation of individual lo-
tivities [28]. gistics models from the point of view of how individual lo-
Measuring logistics costs is an extremely difficult proc- gistics costs categories and processes are treated. Figure
ess. The same applies to modelling logistics costs, because 5 shows the treatment of individual logistics costs by year
the relations between their decision variables are often for the period from 1985 to 2018 [6, 7, 31, 5, 12, 41, 4, 10,
unknown. For example, one such variable is the impact of 15, 39, 21, 19, 33, 30, 17, 37, 1, 13, 2, 34, 23, 29, 24, 20].
the construction of an additional distribution centre on all During this period, the authors developed various logistics
logistics costs. In this case, inbound and outbound trans- cost models that focus mostly on handling transport costs
port costs, stocks costs, labour costs and warehousing (36%), stocks costs (36%) and warehousing costs (18%).
costs can be modelled, but all these estimates are based on The cost of ordering and other logistics costs represent a
current data, so the ability to forecast is limited for each of 4% share of all logistics costs.
the listed variables. Logistics costs are therefore difficult The analysis of the combination of logistics costs that
to model, because they can be affected by so many exog- are analysed by individual models shows similar results. Of
enous factors, many of which are nonstationary [38]. the n = 24 scientific papers, 10 cost models (41.67%) deal
with transport/stocks cost optimisation. These are followed
3 Methods by studies dealing with transport costs (n = 2; 8.33%);
transport/warehousing/stocks costs (n = 2; 8.33%); trans-
For the purpose of obtaining information and search- port/warehousing/ordering costs (n = 2; 8.33%) and ware-
ing the literature, the Clarivate Analytics database of the housing/stocks costs (n = 2; 8.33%).
Web of Science (WoS) portal was used. An analysis and a Figure 6 shows the individual logistics processes with-
synthesis of scientific articles dealing with the optimisa- in the treatment of logistic models 2018 [6, 7, 31, 5, 12, 41,
tion of logistics costs for the period from 1985 to 2018 4, 10, 15, 39, 21, 19, 33, 30, 17, 37, 1, 13, 2, 34, 23, 29, 24,
were carried out. In order to analyse the subject of the 20]. In the period from 1985 to 2018, the authors main-
study as widely as possible, the terms “logistics costs” and ly dealt with the optimisation of the distribution process
“logistics cost models” were used in the search. 24 scien- (57%), followed by the purchasing process (32%) and

Figure 5 Individual logistics costs within the treatment of logistics models

Source: Author
R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109 107

Figure 6 Individual logistics processes within the treatment of logistics models

Source: Author

internal processes (11%). The analysis of the combina- The first obstacle to managing logistics costs there-
tion of processes that are analysed by individual models fore appears at the global level in their classification, as
shows similar results. Of the n = 24 scientific papers, 13 there is currently no uniform definition or standard to
cost models (54.17%) deal with distribution. This is fol- unify the individual logistics costs. This was the premise
lowed by the studies that deal with the purchasing proc- for the study conducted by Rantasila [27], which analysed
ess (n = 7; 29.17); internal processes (n = 2; 8.33%); the 66 scientific papers and identified 24 different logistics
distribution process/purchasing process (n = 1; 4.17%) cost components. Inconsistent classification can affect the
and distribution processes/internal processes/purchasing identification of all relevant cost components in practice,
processes (n = 1; 4.17%). as logistics costs arise in various business areas, such as
sales, purchasing, manufacturing and logistics. Due to the
5 Discussion and Conclusions lack of knowledge of logistics costs, the interests of indi-
vidual functions (sales, purchasing, manufacturing, logis-
The aim of the study is to determine the scope of the tics, etc.) are often emphasised, which are not always in
optimisation of individual logistics models from the point line with the common interests of a company’s business
of view of how individual logistics costs categories and process [34]. These are the main factors that affect the lev-
processes are treated. The extent to which each individual el of difficulty of managing logistics costs.
model can be optimised, depends on the type of processes Therefore, it would be appropriate to develop a uni-
covered by the model. Based on a detailed analysis of sci- fied standard to define the field of classification of logistics
entific studies, it can be concluded that most models are fo- costs that could be applied at a global level. This would
cused solely on controlling the cost activities of transport, facilitate the measurement and presentation of logistics
warehousing or stocks. For a detailed definition of the logis- costs, which are the two fundamental conditions for their
tics process and the optimal ratio between the costs and the effective management. Thus, an overview and analysis of
quality of logistics processes, it is also necessary to iden- logistics cost management issues provides important em-
tify different logistics costs. The studies focus on transport pirical support for improving logistics processes in supply
costs, warehousing costs and stocks costs, as they represent chains. The presented study also provides a synthesis of
the largest share in the logistics costs structure. Other logis- the scientific literature in the field of logistics cost model-
tics costs are given less consideration, also due to the fact ling, which can be an important framework for future em-
that different authors classify them differently and directly pirical studies.
group them under the three most frequently studied types An analysis of past and current scientific studies was
of logistics costs. However, this should not preclude the es- carried out, which is related to the development of logis-
tablishment of a system capable of estimating and meas- tics cost models. In the future, it would also be worthwhile
uring all logistics costs and then efficiently integrating the to analyse any research related to the measurement of lo-
changes in the business process into a cost model. gistics costs in companies.
108 R. Muha / Scientific Journal of Maritime Research 33 (2019) 102-109

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