Logistics can be defined as the planning management process of the movement of goods or people from the place of origin to the point of consumption by using transportation across the country or the globe in order to meet the requirements of customers or clients. For example, Julie’s company will provide the map that repeatedly used to shipped goods or raw material to them or to customers by using a single mode of transportation or combination of travel methods which can include ships, trains, airplanes and trucks. Logistics are used in every companies to plan and manage the right location in order to send the right amount of things at the right time as an element of their overall supply chain management.
However, logistics costs can be derived from logistics management that needs to keep balance between cost and operation. Normally, logistics costs comes from the charges of using various transportation modes where airplanes charges are the highest among other modes because it is the fastest. Other than that, airplanes need fuels in order for it to fly; placing goods in warehousing space will charges for utilities; packaging, material handling and security will need workforce to run it and there are needs to pay for salary; and lastly tariffs and duties need to be paid for import and export activities. All of these events will add up the logistics costs in the supply chain management (Hartman, 2016).
On the other hand, supply chain means that the network between supplier, manufacturer and customer that encompassed the combination of processes, relationships and activities for products, services and financial transactions from original producer to ultimate end-user. The more network between these three main elements, the supply chain can change from direct supply chain to extended supply chain until it become ultimate supply chain (Paul R.Murphy, 2015). Supply chain management is the flow of goods or services that include work-in-process inventory, movement or storage of raw materials and finished goods from point of origin to point of consumption.
Logistics cost can happen at inbound, intra-firm and outbound where inbound means the flow between supplier and manufacturer. All the logistics costs happen in inbound because of the movement of raw materials from supplier to manufacturer to produce finished goods. Even when manufacturer outsourcing parts from other companies, it is called inbound flow. As for intra-firm, the logistics costs happen only in the manufacturer itself such as the cost of storage in their warehouse, assembly costs of the finished goods and material handling costs. Lastly for outbound flow happen between manufacturer and customer where the manufacturer send out their finished goods to companies for distribution or storage in the companies’ warehouse and movement of finished goods to end user. There are several logistics costs happen in outbound flow that need to be monitor in order to have higher profit for manufacturer.
Logistics costing tools in upstream or inbound are cost estimation, cost to serve, cost transparency, open books costing, value chain analysis and total cost ownership. As for intra-firm flow involves logistics costing tools such as standard costing, activity based costing, activity based management, balance scorecard, economic value added and kaizen costing. Last but not least is the downstream or outbound that have cost transparency, customer profitability analysis, inter-organizational costing, life cycle costing and landed costing as their logistics costing tools.
Logistics costing tools are very important to manage a company’s costs so that it could provide adequate data for a good management, driving people to use the right and specific management tools and to make management easier. According to (Bokor, 2012) it is crucial to achieve dependable and accurate costing information using exact calculation of logistics costs in order to accomplish efficient resource provision within the logistics service provider companies. Thus, improved costing model from traditional costing approaches has interjects logistics costing to be more accurate and transparent. Besides that, performance and costs will have more visible relations that improves the effectiveness of logistics planning and controlling extensively.
In inbound flow between supplier and manufacturer, there is total cost ownership (TCO) that can be explained as the true cost of buying a product or service that comprise other elements that reflect extra costs produced by the suppliers in the purchasing company’s value chain. The extra costs are the reflection of resources being used for the added activities linked to the purchasing process and resulting from the activities and cost drivers are finalized by the company’s activity based costing system (Degraeve & Roodhooft, 1999).
According to (Degraeve, Roodhooft, & Van Doveren, 2005) these system practices a dynamic mathematical programming model that minimizing total costs while taking into account the significant limitations to originates purchasing strategy. This system also enable converting available information into practical knowledge where precisely the calculation of TCO directs to a management decision support system and the objectivity of the system will be achieved.
The costs of purchasing, holding, poor quality and delivery failure is used to identify the total attainment price in TCO. In order to measure and evaluate the suppliers, companies start to use this system in their manufacturing (LaLonde & Pohlen, 1996). How far the inter-firm relationships influence costs within the purchasing firm can be calculate through this system because it has links supplier accomplishment to specific activities done and interprets the activities into costs.
When dealing with specific vendors, TCO are capable to run more accurate picture of the activities and resources consumed compared to activity-based costing. For example, TCO analysis could reveal the hidden costs of ownership if the management include all important costs such as labor costs and costs caused by system acquisition. How well the degree of trained employees, employed and managed will be the key importance in establishing the actual cost of ownership in the company.
Logistics costing tool in intra-firm at manufacturer is kaizen costing where it comes from a Japanese word which specifies a process of continuous improvement of the standard way of work where the meaning of (kai) is change and (zen) is for the good. In 1950, the management and government in Japan has recognize a problem in the argumentative management system and there is an unresolved employment scarcity. Thus, Japan tried to solve the problem with collaboration of workforce because the basic in labor contracts have been taken place by the major companies where they introduced lifetime employment and plans to spread advantages for the development of the company. This contract has remains as the background of all Kaizen activities to provide security that guarantee confidence in the workforce.
In 1986, Imai has introduced and applied Kaizen costing in order to improve their carmaker in Toyota, a Japanese carmaker company in term of efficiency, productivity and competitiveness. Since then, Japanese manufacturing systems have used Kaizen and it has interposed massively to the manufacturing success (Singh & Singh, 2009). Based on the literature review of Kaizen concept, it has the ability to boosts up the productivity of the company and it assistances to produce high-quality products with a minimum efforts. Imai also has said that continuous improvement process in Kaizen involve everyone in the manufacturer because it is a strategy that comprises concepts, systems and tools of leadership.
I will use example from (Monden, 2000) where Daihatsu Motor Company of Osaka, Japan has used Kaizen costing practice in their mini-car manufacturer that owned in part by Toyota. In terms of domestic sales volume, they has been ranks as s
eventh of the nine Japanese automakers where they have sales out numbers of Isuzu, Mazda and Subaru. They have established in more than 120 countries but in early 1992, Daihatsu had announced to withdraw from the U.S market due to its strategy change and now, Toyota as a partner of Daihatsu, uses the similar system of Kaizen costing in their production. Kaizen costing will target for development in productivity, safety, effectiveness and waste reduction because skilled employee will use inventory efficiently to reduce wastage. Other than that, team members’ commitment can be improved so that they are able to do a good job which can increase people satisfaction. Moreover, it may increase competitiveness in efficiency that tends to lower the costs and produce higher quality products (Team, 2016).
Lastly, logistics costing tools in downstream or outbound network between manufacturer and customer is life cycle costing (LCC) that can be described as a method that allows comparative costs estimations being made over a specified period of time and taking all significant profitable factors in terms of initial costs and future operational costs (Gluch & Baumann, 2004). LCC is about all costs related to the product’s entire life cycle that can traces revenues of each product over several period of time throughout the entire life cycle. Manufacturer are able to allocate the base of life cycle costing on a predictable number of units to be traded over the product’s life (Agarwal, 2015).
LCC is used to make optimization between product performances with lifetime cost of ownership. Other than that, it also can sum up all the total costs of a product, process or activity discounted over its lifetime (Gluch & Baumann, 2004). Nevertheless, LCC is different from life cycle assessment (LCA) where LCC gives differences in their scope and method in term of comparison in cost-effectiveness of alternative investments or business decisions from the perspective of an economic decision maker such as manufacturing firm or a buyer. During the economic life of the investment, LCC activities will cause direct benefits to the decision maker where the cost and benefit monetary flows directly influence decision maker.
There are several benefits from using LCC such as promoting long-term rewarding to the manufacturer; from an accurate and realistic evaluation of revenues and cost, LCC can guarantees better decision on a particular life cycle stage. Other than that, to reflect total increasing costs over the life span of the product, LCC can provides an overall framework for it and it may give earlier results to generate revenue or to lower the costs. That is the reasons why manufacturer uses this type of costing tool in their outbound network with customers because it enable the companies to be aware in what life cycle stage does their products are in so that they are able to create high impact on costs and profits (Agarwal, 2015).
Based on (Dhillon, 2013), the example of life cycle costing concept can be seen in many state in United States of America in term of automobiles and air conditioners such as in California, North Carolina, Wyoming, Kentucky, Arkansas, Washington, Louisiana and Connecticut. They use life cycle costing for combined products such as tractors, heat pumps, copying machines, refrigerators, freezers, light bulbs and many more. It gives opportunity for both the manufacturer and the user to consolidate effectively in order to control the life cycle cost so that they are able to achieve the maximum benefit from restrained resources.