COST OPTIMIZATION FOR A TRANSPORTATION AND LOGISTICS COMPANIES
Table of Contents
Transportation and logistics companies face with expenses in their operations constantly. This research is significant to the transportation field due to a wide range of the existing methods in other industries that require a careful selection. The main goal of the proposed research considers the analysis of the most common practices and ways of the cost optimization in a company’s activities. The detailed instruction of implementation of the chosen method will be the outcome of the research. It is expected that the developed plan will include the foundation to all possible changes in order to fit the specific requirements of the industry. Completed series of actions will be universal not only for transportation field and could be applied everywhere.
Key words: cost optimization, transportation, cost management.
Every day a huge number of organizations operate around the world. They have a different level of their development; thus, each company deals with numerous problems that correspond with the stage of development. The main issue is a direct correlation between the size of costs and the level of complexity of activities. A small or “new” organization faces with a low level of expenses. They perform standard operations at the beginning of their “existence”. As long as they start to evolve their business processes, they face with issues of another complexity. Companies should pay attention to the instruments of modelling such as SCOR-model or Retail-H that allow researching the current bottlenecks and removing them quickly. A review of potential problematic areas leads to a cost optimization in the processes of the company.
The cycle of development repeats every day, and companies still require different methods to obtain the aim that consists in optimization. The main goal of the research is to investigate the basis of costs and optimization. The steps should be taken in order to achieve the target. The first objective is to understand the business processes of organizations and estimate their role in the companies’ performance. The second objective consists in the research into a possible way to optimize the costs of the company. Additionally, the step includes the observation of existing methods of reducing expenses that are described by domestic and foreign authors. The last objective involves design and modelling of the detailed plan that provides the right and unique way of the process. The list of the steps will be suitable to every sector or industry, and it consists of clear and effortless instructions to “build” companies’ own plan.
Delimitations and limitations of the study
The first boundary of the research is the analysis of a narrow circle of companies’ practices. The best experience will be reviewed from the companies-leaders of the market in the transportation sector. Their performance is an implication of the best existing practices. The possible failures of using different methods are often related to the lack of knowledge or experience. This situation is common for small and undeveloped organizations.
The detailed instruction provides an overall review of the existing methods and collects them in one place. The plan gives an opportunity to fully explore the ways of cost optimization and find the best fitting practice. Previous works on this theme contain independent information and do not take into account other authors’ opinions. The developed plan will be used to illustrate its implementation, and the focus company will be Fesco, which is one of the best companies in the transportation sphere. The example will prove that the best practice approach does not require a significant number of resources to achieve the main target to entirely optimize all costs.
It is a well-known fact that costs play a vital role in a company existence and development. They become its first barrier in the running of operations as they should be highly efficient and should not be expensive at the same time. However, the first step of this research involved an explanation of general understanding of “costs” that take place in the organizations. The second step consists in an analysis of different classifications and types of costs and a comparison of several points of view on this question. Transportation costs and ways of their optimization will be also discussed in this paper later.
Understanding of the term
In the world, almost every company understands and explains costs differently. The most general explanation of the term “costs” refers to the amount of money that manufacturers spend on production of their products (“Cost”, 1995). Nevertheless, every author suggests their own classification of costs. The main differences can be expressed from different points of view on the composition of costs. Parker (2015) claims that costs should include production expenses in addition to the expenses on the creation or modelling of the product. Surbhi (2014) suggests considering the sum of all expenses and defines a percentage of profit as a price. This concept is mostly connected to the production field rather than the transportation one, but it plays a major role in the general understanding of the topic. Surbhi analyzes the costs including a review of spendings on land and property. The amortization should be taken into consideration in order to compensate the equipment deterioration and replace a broken machinery at the right time. In addition, a percentage of profit is also connected to the company’s property. It can be described as an expectation of the manufacturer of the sales level, a product value to the customer and a potential part of price on replacement.
Furthermore, a company’s costs can be classified by location of expenses. Seuring (2014) delineates the three levels of costs: direct costs, activity-based costs, and transactions costs. The first type of costs consists in expenses on materials, employees’ labour and maintenance, and it can be assigned to a unit of the product or service. The next one is connected to the internal performance of the organization. Activity-based expenses take place during organizational or administrative processes. They include spending on coordination of departments inside of the company or problem resolution. The last kind of expenses that was described by Seuring is transaction costs. They appear in points of connection of the company and other parts of a supply chain and involve active cooperation via electronic data interchange or other similar technologies.
Ross (2015) identifies four types of costs in organization. He differs fixed, variable, joint and common kinds of them. Fixed expenses take place in every operation, and they are independent of the scale of production in general conception. Specifically, the volume of shipment does not have an impact on a level of expenses. For example, Russian organizations pay the motor vehicle tax regardless of usage of trucks during the whole year. All fixed costs should be covered by revenue of the company. Therefore, variable costs also play a great role in the processes. They are heavily affected by the number of shipments. The most common types of this type of costs are related to the expenses on fuel and vehicle maintenance that “consume” a major part of the company’s budget. A larger number of carriages requires more expenses; therefore, the total sum of fixed and variable types represents a unit cost.
Joint costs are related to the transport services and often take place in the situation of data interchange between carriers and sellers. The general network considers the coordination of procedures and processes to deliver the goods properly to the customer. The support of the network and provision its good condition requires strong efforts and a significant amount of money that should be shared by two sides of the transportation contract proportionally.
The last type of expenses is called “common costs”. They refer to the problems of routing. On a daily basis, transportation companies solve a problem of the right way of goods’ delivery. They should pay attention to the position of terminals or the restrictions in using some roads by trucks. This type of costs is also shared by all sides of contract and depends on a carrier’s volume of responsibilities.
Ways of the optimization
The comparison of two classifications described earlier makes it obvious that authors define the same mechanisms and concepts with small differences and give them other terms. It leads to the easier investigation of the optimization process of the costs. The main and most general instrument to control the company’s expenses in all industries can be expressed as cost management. Groth and Kinney (1994) put forward three ways of optimization: cost containment, avoidance and reduction. The first direction consists in “constraining and avoiding future increases” and requires a higher level of attention to supporting the certain size of costs. Cost avoidance involves an elimination of all processes and activities that add costs and play a non-vital role in the organization’s performance. The last method aims to cut or lower the costs of the processes using all possible instruments.
Additionally, transportation companies can apply more defined instruments to control their expenses. Ross (2015) suggests correlating the size of the shipment to the size of the transportation mode in order to eliminate an ineffective usage of truck’s volume. The forecasting is a major and necessary step in the company’s performance. Future predictions organize the stable foundation in the emergency situations and help to avoid them completely. Slight improvements of the handling processes are also suggested by Ross. The reduction in the time of pickup, delivery and packaging that speed up the whole supply chain can be achieved by an implementation of new low-cost technologies.
The most drastic measure to change the level of costs is the reengineering of business processes. It involves the whole “destruction” of the existing activities and a sequential construction of the new processes from the “old” parts. Reengineering allows the company to understand their structure and bottle necks more appropriately and analyze the general performance using a new concept or idea. All methods and instruments of the costs optimization can be applied separately or changed in accordance with the specific purposes or requirements of the industry.
The existing ways of the cost optimization can be compared and described differently. The easiest and most clear action is related to the comparison and further analysis of them. It considers the investigation of their description, math equations and results of its implementing. Another way to evaluate the quality of instruments is to do the ranking by using the expert evaluation method.
Method of expert evaluation considers choosing the certain range of factors that can be quantitative and qualitative. A group of experts evaluate every quantitative factor and rate them, for example, from 1 to 10. Second type of the factors considers converting “classes” to the values. For example, class “low” can be interpretated as 1, and class “high” – as 5. After all obtained marks were taken into consideration, the initiator of the discussion calculates the final score using different methods (Efimenko et al., 2018). The highest score means that method or instrument is the best practice for the particular satiation. This method enables to get rid of subjectivity of the judgements or to minimize this phenomenon.
The analysis of the ways of the optimization also contains a comparison of methods. However, the ratings are not included in this model. The method implies choosing the vital factors and comparing them one by one. The uncomplicated analysis provides a separation of all methods, which results in valuable and appropriate outcomes.
In addition, there is no opportunity to investigate and analyze all existing ways due to a countless amount of them. The research supposes the explanation and description of the most common instruments. This limitation leads to the unproblematic exploration and does not require a comprehensive approach and physical potential. The main gap of the research, which consists in the absence of applicable and explained methods in transportation field, will be covered by creating a summary table or plan of reviewed ways of the optimization.
Obviously, business processes play a vital role in the performance of the company as without them it is not able to exist in the field. It has been discovered that there is a wide range of costs classifications, and their basis consists in the same ideas. The general way of the expense’s optimization correlates with cost management. Companies are able to use the existing methods of optimization or to create their own plan to improve the costs in better way. However, the main outcome of the research will consist in a detailed instruction that will be universal for the most part of companies. It is expected that companies will not implement a created plan directly without any improvements. Nevertheless, organizations will have an opportunity to apply methods without changes. Additionally, the plan will contain a description of every step and some recommendations about the best way of their implementation.
Some methods contain complex math equations and their systems. Minken and Johansen (2019) offer to optimize costs in transportation using economic order quantity model (EOQ-model). Other models include only a general approach to the analysis and consist in linear changes. Ross (2015) suggests applying simple calculations of the costs and a further comparison of the obtained results with competitors.
In general, cost optimization in the company’s processes is essential for every organization. The number of transportation corporations is growing steadily, and it leads to the intensification of the competition between them. All players in the market are forced to use different tricks and strategies to keep the level of performance in order to stay competitive.
The proposed research has definitely reached the assigned tasks entirely; in addition, it is discovered that term “costs” can be described in various ways. However, its general idea involves the concept that it represents a particular portion of the money that the manufacturer spends to produce goods and services. The various classifications are defined in the management and logistics. As is mentioned above, these classifications correspond to the same general ideas that are explained from slightly different points of view.
Companies are able to optimize expenses using the concept of the cost management that can be implied without any restrictions in all industries. Cost management offers three main ways of optimization: cost containment, avoidance and reduction. It is supposed to adjust such factors as transportation mode, size of packaging or truck’s load capacity in the transportation field. The developed scheme of implementation considers minimizing the gap of absence the effective methods of optimization.
Cost. (1995). In Cambridge dictionary online. Retrieved from https://dictionary.cambridge.org/ru/
Efimenko, A., Zlobin, I., Avilov, A., & Markov, A. (2019). Application of expert evaluation method for realization of tasks in construction industry. E3S Web of Conferences, 91(6). doi: 10.1051/e3sconf/20199108034
Groth, J. C. & Kinney, M. R. (1994). Cost Management and Value Creation. Management Decision, 32(4), 52–57. doi:10.1108/00251749410058680
Minken, H. & Johansen B. G. (2019). A logistics cost function with explicit transport costs. Economics of Transportation, 19. https://doi.org/10.1016/j.ecotra.2019.04.001
Parker, D. (2015). Contemporary Global Property Management Issues. Being technical paper presented to the post graduate students. Batu Pahat, Johor, Malaysia: Tun Hussein Onn University of Malaysia, Faculty of Technology Management and Business.
Ross, D. F. (2015). Transportation Management. In: Distribution Planning and Control. New York: Springer.
Seuring, S. (2002). Cost Management in Supply Chains - An Apparel Industry Case Study. In S. Seuring & M. Goldbach (Eds.), Cost Management in Supply Chains (pp. 111–115). Physica-Verlag, Heidelberg: Springer.
Surbhi, S. (2014) Differences between price, cost and value. Retrieved from Keydifference.com website: https://keydifferences.com/difference-between-price-cost-and-value.html
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