True Logistics Costs and Their Impact on Supply Chain Resiliency

Geopolitical conflicts, strike threats and weather-related disasters tested supply chains in 2022–23, adding new headaches for businesses still grappling with the fallout from the pandemic.

These disruptions have caused major supply chain interruptions, like factory shutdowns, labor shortages, labor strikes, inflation in prices, numerous freight broker bankruptcies, and transportation delays to drastic fluctuations in demand, exposing the vulnerability of global supply chains and forcing businesses to prioritize supply chain resiliency.

The Age of Supply Chain Resiliency

Supply chain resiliency refers to the ability of a supply chain to anticipate, withstand, recover from, and adapt to various types of disruptions. It’s akin to taking out an insurance policy on business continuity; companies build and maintain capabilities they might not necessarily use in their daily operations, but that are crucial in times of disruption. It’s not merely about surviving disruptions; it’s about emerging stronger and thriving amidst them.

A significant aspect of building supply chain resiliency is understanding the true costs of logistics in different scenarios, also known as logistics cost sensitivity. This means developing tools that accurately simulate the costs associated with varying levels of disruption across all aspects of the supply chain — from inbound and replenishment to fulfillment and sales logistics. Business leaders need insight into which factors significantly affect cost and how to best mitigate the financial impact.

Realizing True Cost

An insightful and granular understanding of logistics costs hinges on the vital process of logistics auditing. This entails knowing the precise costs for every possible step, event, and touch point in the logistics processes and importantly, understanding how each facet affects others. Acquiring this knowledge allows a business to develop a robust financial framework that copes with disruption while preserving the bottom line.

Most businesses recognize deterministic repeatable events in the supply chain that have simple cost structures. However, this approach only paints a partial picture. We are yet to fully integrate and consider more complex aspects such as validating the occurrence of reported supply chain events, complex terms and conditions, unexpected accessorial charges, and integrating external databases for validations, among others.

These neglected charges bear a common characteristic; they are tied to elusive, dynamic, and apparently unpredictable events that exist as small components within large supply chains. They represent isolated fragments adrift in the vast data ocean that characterizes modern supply chains.

Logistics Auditing in 2024 and Beyond

In light of this, we need to evolve the current approach to logistics auditing. It’s time to create a dynamic, interconnected ecosystem of operational and financial data, capable of adapting to the volatile nature of supply chains. This structure empowers complete auditing, thus enabling businesses to not only have a clear picture of their true logistics costs but also equipping them with the necessary data to make proactive, informed decisions. The business environment is evolving rapidly, and this evolution necessitates a shift from a reactive to a proactive approach in managing and planning for potential disruptions.

Moreover, fostering an understanding of these complex logistics costs allows organizations to model potential scenarios, identify risk factors, and set in motion strategies to mitigate the consequences. These strategies could span from adjusting inventory levels, adapting shipping methods, renegotiating contracts, or exploring alternative paths in the supply chain.

However, assembling this dynamic ecosystem of data is not a simple task. It requires advanced technological resources, strategic management, expertise in data analysis, and strong collaborative efforts across the entire organization.

Crucial to this change is the investment in technology solutions, like AI and machine learning, which can help consolidate and analyze this vast sea of data. They can detect patterns, make predictions, and provide valuable insights that humans might overlook. On top of that, these technologies allow companies to conduct ‘stress tests’ on their supply chains, revealing weak points that need attention and potential improvements to enhance resilience.

Agile Resilience as a Cornerstone of Logistics

In an era characterized by unpredictability, resilience has become non-negotiable for businesses. Understanding the true logistics costs allows businesses to gain a comprehensive perspective of their supply chains, enabling them to both anticipate and react to disruptions swiftly and more effectively. While accounting for every eventuality is impossible, having a robust system that identifies cost factors and their potential impact is an essential step towards building resilience.

Recognizing the need for an interconnected ecosystem of operational and financial data will allow businesses to respond swiftly to changes, validate a wide spectrum of costs, and ensure that every stage of the logistics process is optimized for both efficiency and contingency planning.

Change on this scale will undoubtedly bring challenges, including the integration of new methodologies into existing systems, upskilling employees, and making significant upfront investments. However, businesses that take these steps proactively will be rewarded with increased resilience, enhanced profitability, and an operational agility that sets them apart in a volatile marketplace.