Part I - Discovery of Internal Cost Structure
This is the first of two articles around managing the rise of transportation costs. We will explore the differences between the known costs that companies are aware of and track vs. the hidden costs that they may not be aware of or tracking. We will also review how companies can identify areas of opportunities associated with these costs.
As companies strive for increased profitability, they often focus on ways to increase revenue, profit, and margin. One way to accomplish this is a review of their cost structure to look for ways to optimize and reduce expenses. Within these expenses, there are two areas to look for opportunities. The first are known costs. These are expenses that are easily accounted for and tracked. They are often recurring and front of mind. The other are hidden costs. They may not be tracked, accounted for or part of a dependency system. While this is applicable to all companies, examples specific to supply chain will be discussed later in this article.
Where known costs may be the easiest source to identify reductions, one area of potential for profit increase may be in a company’s hidden costs. In the current climate, costs in many categories are dynamically changing, and some areas of logistics expenses are experiencing increases due to inflation and other factors. Many companies base their forecasts on past expenditures, which increases the risk of profit erosion due to increased operating costs. These deltas have the potential to have an impact on a company’s overall profitability.
While these changing conditions need to be accounted for, companies must identify additional areas that have the potential to impact their bottom lines. While some expenses may be in plain sight, others may need to be discovered by conducting a thorough analysis and brainstorming. One such area may be onboarding new employees. Although there are known costs, there are some that are not traditionally accounted for, such as training and administrative tasks. When onboarding a new employee, the learning curve will often impact productivity and quality. Although most companies have high quality pass numbers, there can be escapements. When there are, other hidden costs can be triggered, such as the need to have the product returned, replaced and shipped.
Transportation costs are currently a key focus and can also be a source of hidden costs. With fluctuating fuel and labor prices, transportation can result in unexpected price changes and expedite fees. Related to transportation factors, raw material prices are also on the rise in many areas and are dynamically changing. These factors have created increases in supplier and vendor pricing, creating additional pricing impacts.
There are other areas in an organization that can impact costs and often a specialist can help determine a company’s current state and an improvement plan. This can have a positive financial benefit for the company. One such area can be examining the efficiency of logistics operation. Areas of opportunity include streamlining and increasing the efficiency of how a facility operates, the employee tact time and how inventory is routed. These and other areas can make a significant difference to cost reduction efforts and bottom-line profitability.
Assessing the structures that are in place to capture costs can also be a key factor when looking to reduce costs. Things to consider include the methods that are used to calculate cost forecasting and if they account for emergent price increases. Likewise, the sources for cost data accounting for all costs, both known and hidden. Finally, year over year (YoY) cost datasets should be reviewed for accuracy.
In summary, although there are unquestionable rises in fuel prices (more than a 200% increase since 2020), there are other known and hidden increases in costs impacting a company’s profitability. Some of the rising costs may not be known, and there will need to be ways to determine and track them. Developing new structures to capture these cost increases, creating visibility and monitoring them can result in increased awareness and set the stage for an improved operating structure. These new tools can clarify a company’s true costs. In our next blog entry, we will feature a follow-on to this article where we will discuss overcoming challenges and seizing those opportunities.