Unlocking Profitability: A Comprehensive Guide to Optimising Your Logistics Costs

How to Measure Your Business

STEP 1: gathering data

Collect monthly totals for all costs and shipments previously mentioned. This data provides a clear view of your logistics expenses and their impact on your business.

Data to gather:

Total Pick Pack Costs
Total Courier Costs
Total Storage Costs
Total Number of Orders, Packages, and Items Sent
Total KG Sent
Total Revenue for the Month
Total Shipping Charges Paid by Customers

STEP 2: identifying ratiosWe take the totals identified and use them to work out monthly averages.

This is important because most logistics activity and expense is relative to the volume of outbound orders that are processed. Looking at total costs alone can be misleading if order volumes fluctuate month to month. High total costs in a given month may simply reflect an increase in order volumes, rather than inefficiencies or rising expenses.

Key Ratios Explained

Average Number of Items per Order: Indicates customer purchase behaviour and basket size. A higher average suggests customers are purchasing more items per transaction. 
Average Number of Packages per Order: Helps assess packaging efficiency. Multiple packages per order can indicate potential inefficiencies in packaging that might be reduced for cost savings. 
Average KG per Order: Provides insight into the volume each order represents. Understanding this helps in planning and optimising shipping and handling processes. 
Average Pick Pack Charge per Order: Reflects the efficiency of fulfilment processes. Lower charges indicate a more streamlined and cost-effective fulfilment operation. 
Average Courier Cost per Order: Indicates the average delivery cost per order. This helps in assessing the cost-effectiveness of your shipping strategy. 
Average Service Cost per Order: Shows average total servicing costs for each order. This includes all logistics-related expenses, providing a comprehensive view of order-related costs. 
Average Courier Cost per KG: Shows the average courier charge per KG of product being sent out. This metric helps in evaluating the cost efficiency of your shipping operations on a per weight basis.

STEP 3: Tying cost ratios to revenueWe now have an idea of the average cost per order from multiple perspectives.

This step involves assessing these cost ratios against the revenue side of your business. This is crucial because logistics costs must be evaluated in proportion to your sales activity to determine if they are cost-effective.

Why This is Important

The best retailers understand their unit economics intimately, including COGS, Margin, and Marketing Costs. Presenting logistics costs in this way allows you to include them in your unit economics. Ultimately, the profitability of an order is determined by how effectively you can stretch the revenue over all order-related costs to maximise profit..

UP NEXT:

Understanding Your Results

Explore how to interpret your logistics data and what it reveals about your business operations.