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Digitisation as a means for Reducing Logistics Cost

In today’s world most of the goods we purchase come from outside of our own area. Have you ever wondered how these items get to your hands from the producer?

The system of getting goods to your hands from the producer is known as “the supply chain”.

This is actually an oversimplification of supply chain and supply chain related activities. A supply chain can be as simple as buying an orange which was just plucked from a tree or as complex as assembling an airplane with parts manufactured in several countries. Along this train of thoughts, it is easy to see that everything has its own supply chain.


What is logistics?

Delivering goods to your hand is one of the major tasks of a supply chain. This "delivery" is done by transporting goods by many means. Transportation and transportation-related activities in a supply chain can be called “Logistics”.

There are two major forms of Logistics.

  1. Inbound Logistics - Transporting goods to a factory or warehouse
  2. Outbound Logistics - Transporting goods out of a factory or warehouse

These Logistics operations contribute to a major cost component of the supply chain. It can come up to more than 50% of the overall supply chain cost.


How to reduce the cost of logistics?

Transportation cost is directly associated with the number of vehicles used to move the goods and their mileage. Higher the number of customers we reach out to, higher the number of vehicles that leave our factories and warehouses, and the mileage they cover. It will also increase the number of vehicles which deliver raw materials to our factories.

We can't make logistics cost ZERO by halting all the transportation activities! 

Then how can we reduce the transportation cost? The answer is clear; it is by lowering the number of vehicles and their mileage.


How can Digitisation help with this?

In theory, we can reduce the number of vehicles needed, by consolidating multiple deliveries into one.

Does this mean that if we converge all the deliveries into one vehicle, it will be cheaper? Yes and No. Let’s look at the following example:


Digitizing Can Help with Reducing Cost


If a vehicle is loaded with 2 orders - one is 6000kg (Point A) and the other is 1500kg (Point B). But the distance from Distribution Centre (DC) to point A is 50km and to point B, it is 100km. Even though the vehicle is 75% utilised- space or weight wise - after unloading the goods at Point A, it will drop down to 15%. Then the vehicle, an almost empty truck, goes another 100km to Point B.

In instances like this sending two separate small vehicles can be cheaper than sending one large vehicle with both orders. It is not easy to correctly identify these situations when the number of orders increase.

Let’s take an example of 3 deliveries A, B & C. These deliveries can be arranged in the following manner.

{{A,B,C}} , {A,{B,C}} , {{A,B},C} , {B,{A,C}} , {{A},{B},{C}}

After considering factors like vehicle loading capacity, location of the delivery points, vehicle handling problems at delivery points etc. we can eliminate some of them. Then we can select an option which costs us the least.

However, with the increase in the number of orders, possible ways to arrange the orders will increase exponentially.


How digitizing Can Help with Reducing Cost?


Large organisations get hundreds and thousands of orders per day. Therefore, a mathematical solution is needed for this problem.

Transportation Management Systems (TMS) with transportation planning functions can help by comparing options. A transport/ logistics management system is smart enough to provide dynamic solutions for fast-changing consumer patterns with the help of machine learning.


One Step Further…

The utilisation of a vehicle can be measured mainly in two methods.

  1. Compared to the maximum weight it can hold
  2. Compared to the maximum volume of goods it can hold.

For example, a milk carton is heavier than a bag of chips that has the same volume. If we receive an order for 1,000 milk cartons and 1,000 bags of chips from the same buyer, we can put all the milk cartons in one vehicle and there will still be space left. However, by weight, the vehicle can be utilised up to a 100%. Also, if we try to load all the bags of chips to another vehicle, some bags may have to be left behind due to the space restriction. Hence another vehicle will be required.

Nevertheless, there is a product mix which permits the use of only two vehicles. Both vehicle spaces and weight capabilities will be utilised. With two products it will be easier to find the proportions to get the maximum out of both vehicles. When the number of products increase due to heightened demand, it will get harder for obtain this optimum product mix. This is another occasion where an Intelligent Transport Planning Application can help.


Final Words

Considering these cases, it is clear that digitising logistics planning in supply chains will help reduce the cost of logistics. This article is majorly focused on Outbound Logistics. However these situations are also applicable to inbound logistics as well since one’s inbound logistics is someone else’s outbound logistics.

If you are interested in this, I have co-authored a research paper where you can study more about this.



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