Calculating Logistics Costs

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APPENDIX

APPENDIX. CALCULATING NATIONAL LOGISTICS COSTS
Logistics costs are an important factor affecting the competitiveness of both firms and nations. Firms can enhance their market competitiveness by reducing their logistics costs, thus lowering the total costs of goods and services. Greater market competitiveness of a nation’s firms can then give rise to greater national industrial competitiveness on a global scale.

Total logistics cost analysis is the key to managing the logistics function. It is important that management consider the total of all logistics costs. Controls should be instituted to minimize the total costs of logistics rather than to minimize the cost of each component. However, determining which component of logistics costs to reduce can be problematic, since there is a trade-off between cost components. In fact, attempts to reduce the cost of individual logistics activities in isolation may even lead to greater total logistics costs. Thus, at the level of the firm, attempts should be made to integrate the logistics system so as to minimize total logistics costs.

From the perspective of government policy, however, effective cost reduction in the national logistics system can be accomplished only by identifying individual components. Consequently, the calculation of individual logistics cost components has been critical to nations in their efforts to make appropriate policy decisions. In this appendix, the concept of logistics costs is first defined. This is then followed by an overview of the national logistics methodologies of the U.S. and the Republic of Korea. A.

The concept of logistics costs

Logistics consists of activities that facilitate the movement of goods from supply to demand. As many such activities require the use of ports, port authorities have taken a particular interest in the various port activities involved in logistics. Performance indicators of logistics activities measure the performance of a logistics system and evaluate its efficiency level. As such, performance indicators can be used in improving logistics systems within a particular firm or throughout a national economy. The major reason for measuring logistics performance is to reduce operating costs. Measuring operating costs helps to identify whether and where to make operational changes to control expenses and identify areas for improved assets.

Although logistics performance indicators can be evaluated in various ways, depending on the purpose, in general they fall into one of two categories: (1) costs indicators, which indicate costs consumed in carrying out logistics activities, and (2) service indicators, which indicate the results of logistics activities. Since business competitiveness can be enhanced through cost reductions and service improvements in logistics activities, it is important that companies and governments be competent in measuring logistics related performance.

Cost indicators are popular performance indicators, though the measurement methodology has not been standardized. Moreover, there is no guideline regarding which

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APPENDIX

indicator to use when measuring the efficiency or productivity of individual logistics activities. Logistics costs include the following:













cost of transport activities, for each mode;
cost of storage or warehousing activities;
cost of time value or investment in goods in a logistics system, including the added value of transportation;
cost of physical form changes required for effective and/or safe transport, storage, and handling;
cost of marking, identifying, recording, analysis, as well as data transfer and handling;
cost of stacking/unstacking activities;
cost of added packaging required;
cost of material transfer activities;
cost of consolidation/deconsolidation activities;
cost of information and telecommunications integration;
cost of logistics system management;
cost of unavailability of goods...
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