Distribution / Logistic Budgeted Cost Using 3PL

[Neo]

Logistics / Distribution cost on average accounts for 3%-5% of the selling price of a products.This again varies by region . For an organization to set its selling price accurately , it is the responsibility of the Supply Chain Dept. to determine the value added cost of a products if a company engage a 3PL . Irrespective of types of industries or products this cost is normally divided into two category .

1. Logistic Cost for Domestic Sales
2. Logistic Cost for Export Sales .

The idea of bringing up this area is because alot of companies are outsourcing this activities and as such we need to have a good knowledge on how the cost is calculated . Would like to hear from members who have the experienced and expertise in calculating such cost . Maybe we start by naming the key component cost that is required for this calculation .

Rgds.

[Rob O'Byrne]

Neo,

You raise an interesting point.

My comments would be as follows:

Logistics cost as a percentage of sales needs to be used carefully, as the value/sale price of products varies so much. For example with Building products, it could be as high as 15%

In terms of the sequence of the decision process, I think it would be rare for Logistics costs to actually determine the selling price. It might be the case that COGS gives an indication of potential sale price but often this will be dictated by what the market will bear, or how competitive products are priced.

But you quite rightly point out, that the decision to outsource may be very heavily dependent on the cost differential with the in house option.

An interesting debate.

[Neo]

Originally Posted by Rob O'Byrne

Neo,

You raise an interesting point.

My comments would be as follows:

Logistics cost as a percentage of sales needs to be used carefully, as the value/sale price of products varies so much. For example with Building products, it could be as high as 15%

In terms of the sequence of the decision process, I think it would be rare for Logistics costs to actually determine the selling price. It might be the case that COGS gives an indication of potential sale price but often this will be dictated by what the market will bear, or how competitive products are priced.

But you quite rightly point out, that the decision to outsource may be very heavily dependent on the cost differential with the in house option.

An interesting debate.

Rob ,

Thanks for the comments . Totally agree that building materials logistics cost will be much higher because of the weights and size . But then again COGS or Cost of goods sold only capture the direct cost as logistic cost is indirect or part of selling and administrative cost . In my opinion , we can only determine the selling price only after we know the COGS and the Selling & Adm expenses . Only then we can mark up the margin to get the selling price . In another aspect or to stay competitive we need to know our cost structure in order to control cost .

Rgds

[apparelink]

Originally Posted by Neo

Rob ,

Thanks for the comments . Totally agree that building materials logistics cost will be much higher because of the weights and size . But then again COGS or Cost of goods sold only capture the direct cost as logistic cost is indirect or part of selling and administrative cost . In my opinion , we can only determine the selling price only after we know the COGS and the Selling & Adm expenses . Only then we can mark up the margin to get the selling price . In another aspect or to stay competitive we need to know our cost structure in order to control cost .

Rgds

Hi Neo,

As a importing distributor, our COGS is based on DDP cost (landed duty paid), which is CIF cost + import duty + GST. Cost is based on goods at the distribution point, not FOB. When you start to consider transportation cost and 3PL value-added services such as container deconsolidation, put-away, pick-and-pack, kitting, storage, etc. It also becomes more difficult to assign freight costs to a unit of item because your cost would be different each time if it arrived in a different transport mode (sea/air) using different carrier service (LCL/FCL/TL/LTL) and involved foreign exchange (CNY-AUD). In reality we cannot charge customers differently each time because we have variable cost components in the product. This is why we need to have sufficient margin to cover any cost fluctuations.

By the sounds of your initial question, it appears you are with an exporting manufacturer, where selling price is commonly cost-plus or cost of materials + direct labor + overhead + margin % and usually based on BOM.

However costing and pricing are two different disciplines. The only thing certain is selling price should always be greater than cost in order for a company to be in business no matter where you are in the chain---exporting manufacturer, importing distirbutor or retailer.

Selling prices at wholesale and retail are often driven by market factors and can even be customer-specific but rarely have a strong correlation to manufacturing costs. Wholesale prices are usually a percentage of the RRP/MSRP (backward pricing).

The following examples show the non-correlation between manufacturing cost and market pricing (RRP/MSRP):

• A $300 4x6 digital photo frame (w/ a very low-cost CPU embedded) vs. a $250 19" LCD monitor
• A $70 silk scarf or tie vs. a meter of silk fabric (costing USD3.00 per meter plus CNY5.00 to make)

In my opinion, pricing is just as complex as costing. In the apparel industry many distributors sell the same to different types of customers at different prices and may offer quantity discounts. For example, an independent mom-and-pop store usually pays more than a national retailer for the same item (price discrimination). Many big retailers would also require their suppliers to guarantee a certain sell-thru rate with their products or they need to pay (or share) the cost of markdown with the retailer because they have the bargaining power to dictate the terms and costs.

The following cost model is one I developed for the company after having worked in the apparel/fashion industry for a number of years, from sourcing to manufacturing to distribution to retail. It also applies to soft goods in FMCG and durables. It has a comprehensive set of cost components that spans the entire supply chain. Not all are relevant to your business; many companies don't need to pay sourcing commission if they buy directly from factories. Many large retailers either use an outside buying agent or set up their own sourcing office in the country of origin. Export quota only matters if you sell to the EU or US. Export VAT rebate is another incentive provided to export-oriented businesses by a government like China. Nowadays in China, export VAT rebate has become part of the exporter's margin.

I think you can develop a stage cost model similar to this one for any industry sector, which can be used to optimize the total acquisition cost of multiple items in one or more FCL shipment rather than unit cost of a single item. A distributor or retailer would probably find such model more useful than a China factory selling FOB. Optimization becomes important when you have multiple SKUs and vendors to deal with and if you source products globally. Such a model can also be used for simulation if your company has adopted a multi-country sourcing strategy (sorry I didn't include columns such as currency code and UoM for each item).

Parent Cost Component No. No. Description
FOB BOM Bill of materials
FOB CMT Cut, make and trim costs
FOB FRT-IN Inland freight cost
FOB Q Export quota
FOB REB Export VAT rebate
FOB QA QA inspection
FOB LAB Lab tests
FOB SRC Sourcing commission
CIF FOB FOB cost
CIF FRT-INT International freight
CIF INS Insurance cost
DDP CIF CIF cost
DDP DUTY Import duty
DDP GST GST on CIF plus import duty
DDP FEE-AGT Customs clearance and other charges
3PL DSF Deconsolidation (destuffing)
3PL RCV Put-away (receiving)
3PL SRT Unpack-and-sort
3PL LBL-RRP Floor-ready labeling
3PL STR Storage
3PL PNP Pick-and-pack
3PL LBL-SHP SSCC labeling
3PL CTN Packaging
3PL DIS Dispatch
WSP DDP Landed cost
WSP 3PL Distribution cost
WSP MRG-WSP Gross margin (wholesale)
WSP FRT-DOM Delivery cost
WSP FUL Fuel surcharge
WSP SAL Sales commission
RRP WSP Wholesale price
RRP MRG-RRP Gross margin (retail)

Scott

[Brooke]

Hi Friend,

I cannot agree.Especially in China.You know there are more and more small forwarders companies builded,but RMB is raising,Export drawback is lower and lower,and some government laws that make it more and more difficult for exporter in China.That means they have to try some way to save their cost,How can they save?They want to save through logistics management.
they will also need to supply chain management.

The problem is in China,Many people say they are providing SCM service but only say but do nothing,coz they donot have advanced techlonigy and navegate system. That is why now more and more supply chain companies entering China? At the same time,it seems not so good in China,But it will be a trend. How can you get used to China suitation is the key point.

Thanks + Regards

Brooke