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Why logistics cost rises while volume stays flat

Basel Hegazi · 6 minute read

Volume is flat, the customer base has not changed much, and logistics cost is up a third on two years ago. Nobody in the business can explain it, which is the part that should worry you more than the number.

The cost is not rising. It is surfacing.

In most businesses where this happens, logistics cost did not suddenly become expensive. It was always going to be this expensive, and a series of small accommodations kept it hidden until they could not.

Four leaks account for the overwhelming majority of it, and they compound quietly because each one, individually, was a sensible decision made under pressure by someone doing their job properly.

Rush freight covering planning gaps

The single largest item, almost always. Air freight on goods that were meant to travel by sea, expedited road moves, part-loads dispatched because a customer was waiting. Each is a rational response to a shortage. Collectively they are a planning failure being paid for by the logistics budget, which is why the logistics manager cannot fix it and keeps being asked to.

The diagnostic question is simple: what percentage of your shipments were unplanned? If nobody can answer, that is the first thing to start measuring, because the number is usually two or three times what people assume.

A network that grew rather than being designed

Warehouses get added for a reason — a new region, a large customer, a lease that was available. They rarely get removed. Five years on you have a footprint nobody would design from scratch, with stock split across sites, transfers running between them, and safety stock duplicated in every location because each site needs its own buffer.

Inter-site transfers are worth isolating in the data. They are pure cost with no customer at the end of them, and in a network that grew organically they are often a startling share of total movements.

Accessorial charges nobody owns

Demurrage, detention, storage over free time, waiting time at delivery, redelivery after a failed drop, out-of-hours surcharges. Each is small, each arrives on an invoice with an obscure code, and nobody is accountable for the total because it sits between departments.

At Jeddah and Dammam this deserves particular attention. Demurrage and detention accumulate while documentation is being sorted out, and the root cause is usually a paperwork or conformity problem rather than a logistics one. The cost lands in the freight budget regardless.

Mix shift toward customers who are expensive to serve

The most invisible of the four. Revenue is flat, but the composition changed: more small drops, more frequent deliveries, more locations, more returns. Every one of those was won by a salesperson doing exactly what they were incentivised to do, and none of it appeared in a cost line anyone reviewed.

Build the cost-to-serve view

You cannot negotiate your way out of this, and rate benchmarking will tell you almost nothing, because the problem is rarely the rate. What you need is the cost of serving each product, channel and customer — the calculation almost nobody has.

The method that works is activity-based rather than allocated. Do not spread logistics cost across revenue as a percentage; that hides precisely the differences you are looking for. Instead cost the activities:

• Storage by space actually occupied and time held, not by value.
• Handling by receipt, put-away, pick and pack, with a different unit cost for a pallet pick and a piece pick, because the difference between them is an order of magnitude.
• Transport by drop, weighted by distance and by how much of a vehicle the drop consumes.
• Order processing per order line, which is what makes small frequent orders expensive.
• Reverse flow — returns, credits, damaged goods — costed properly rather than written off centrally.

Two weeks of work in a spreadsheet gets you a defensible first version. Push it to each customer and each product line and the picture is usually uncomfortable: a portion of the customer base is being served at a loss once logistics is costed honestly, and it is frequently not the customers people expected.

What to do with the answer

The point of the analysis is that it converts a cost problem into a set of commercial decisions, which is where it belonged all along:

• Minimum order values or delivery frequency terms for the customers generating the small-drop cost.
• Consolidated delivery days by area rather than daily service to everyone by default.
• Pricing that reflects cost to serve, or a distributor rather than direct service for the long tail of small accounts.
• Network consolidation, once you can show what the duplicated stock and inter-site transfers actually cost.
• A planning fix for the rush freight, which is the one that pays back fastest and does not involve renegotiating anything.

Only after that is a rate negotiation or a tender worth running — because now you can specify what you actually need, and a provider pricing against a clear specification prices lower than one pricing against uncertainty.

Where to start on Monday

• Split last year's freight spend into planned and unplanned. If the data does not allow it, start tagging from this week.
• Total the accessorial charges across twelve months of invoices and give the number an owner.
• Isolate inter-site transfers and cost them separately from customer deliveries.
• Count drops and order lines per customer, not just revenue.
• Cost the top twenty customers to serve, properly, before extending it to the rest.