Source: Adapted from Armstrong & Associates Inc.
Logistics costs are the summation of all expenditures undertaken to make a good or service available to the market, mainly to the end consumer. Global logistics expenditures represent about 10-15% of the total world GDP but vary significantly according to the level of economic development and the orientation of the economy, such as the preponderance of manufacturing, resources, services, etc. For instance, an economy that relies on the extraction of natural resources will have higher logistics costs than an economy focusing on advanced services. The most significant logistics cost concerns transportation (58%), followed by inventory carrying (23%) and warehousing (11%); they jointly account for 92% of all logistics costs:
- Transportation costs remain the dominant consideration as they account for more than half of the logistic costs. They include the costs related to the operation and maintenance of transportation modes and terminals used in the supply chain. They are the costs related to moving goods between where they are manufactured and where they are distributed and consumed.
- Inventory carrying costs are the variable costs of maintaining inventory in a warehouse. They include the costs of holding goods in inventory (capital costs, labor, warehousing, depreciation, insurance, taxation, and obsolescence) as well as the physical handling of goods, including tasks such as packaging and labeling. Inventory carrying costs vary according to the volume handled and are commonly expressed as a share of the inventory value.
- Warehousing costs are the fixed costs of owning or leasing warehousing space, including maintenance and utilities. They vary according to the number and the size of facilities and are irrespective of the amount of inventory being handled.
- Administrative costs include managerial overheads such as customer service, receiving and processing orders, and managing the workforce. They also include information technologies such as computer equipment and software.
Distributors are willing to pay higher rents to take advantage of a logistics site that offers co-location with an intermodal terminal since this strategy enables them to reduce transportation costs, such as drayage, as well as improve their time responsiveness (lead time). Therefore, while transportation costs remain the most important element of logistics costs and the friction of logistics, non-spatial components such as inventory carrying and labor costs, are significant components that will influence locational choice depending on the supply chain.