Research on Logistics Cost Management and Control of Chinese Enterprises

Research on Logistics Cost Management and Control of Chinese
Enterprises
TAN Xuhong1, 2, TAN Mingjun2
1. Postdoctoral Programs of Business Administration, Dongbei University of Finance & Economics,
Dalian, Liaoning, 116025
2. Heilongjiang Institution of Science and Technology, Harbin, Heilongjiang, 150027
[email protected]
Abstract: Along with the development of society and economy, Chinese logistics industry has got a
great achievement, and the level of logistics management is a vital factor which will determine the
competition of enterprises. According to the concrete conditions of China, this paper introduces the
relevant theory and interprets the forming mechanism of logistics cost, and then based on the analysis of
the limitations existing in Chinese enterprises, brings up some suggestions on logistics cost management
and control.
Keywords: Logistics, Logistics cost management, intellectualization management
1 Introduction
Logistics is the physic movement of material from the suppliers to the demanders. Specifically speaking,
it is referred to the moving process of supplying materials, including purchasing, checking, accepting,
storing, and loading, etc. The main effect of logistics is to create value by making up time difference.
While, comparing with traditional logistics, the content of modern logistics is broader, embracing
information industries, distribution industries, storing industries, transporting industries, and so on.
From the viewpoint of development, logistics experienced from quantitative change to the qualitative
change under the development of science and technology and the innovation of management, entering
the supply chain management times. Since the beginning of 21st century, with the development of
network and electronic technology, it promoted the organic combination of information stream, business
stream, fund stream, material stream, and brought the new development to the logistics of the whole
world, and presented a series of new characteristics of intellectualization, which has a far-reaching
influence on the contents and development of the modern logistics. While, with the development of
logistics, logistics cost control was also developing, and the approach and content of logistics differed in
different periods: In the stage of "Physical Distribution " concept, logistics cost control was confined in
the field of selling administration, and emphasized the function of individual logistics cost; Entering the
stage of "Logistics" concept, logistics cost control expanded to the supplying logistics and
manufacturing logistics field, which embodied the principle of logistics cost optimization; while arriving
at the stage of "the Supply Chain Management" concept, the principle of logistics cost management
expanded to the entire relative enterprises in the whole supply chain, and exceed the border of single
enterprise.
Since the concept of logistics cost management has been brought forward, there were various different
interpretations on the concept from the aspect of theory and practice, which made the relative research
stagnated in such a long period until "logistics cost account unified standard" was published in Japan,
1977. As the publish of the criterion, it established a unified standard and a basic reference in the whole
world and boosted Japan becoming the lead country of world logistics control. This logistics cost control
technology policy has the epoch-making value and effect on the development of logistics cost control.
Recently, the consecutive publication of logistics policies and technology standards in China provided
an important platform for the academic research on logistics cost management and control. In summary,
there are several following viewpoints among them:
The mainstream viewpoint, taking Zou-Xianmin as representative, is that logistics cost is composed of
three parts: direct material cost, direct labor cost and service cost. Among them , direct material cost, is
the estimated cost of raw material purchasing in next year, which includes material tax expense, material
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spoilage expense , material checkout expense , transportation expense and insurance expense, etc; while,
direct labor cost, is to be a regular salary; and service cost is collected according to the category of the
service supply, including variable service cost(such as electricity expense, fuel expense, material
consumption expense, etc.) and fixed service cost(such as equipment depreciation expense, managers’
salary, and premium, and so on).
While, there are some other viewpoints, taking Gong-Zhiqing as representative. Based on the dividing
standard of the U.S.A, logistics cost can be divided into storage expense, transportation expense,
logistics management expense. Storage expense refers to the expense of goods conservation, including
all the expenses and the interest caused by holding the goods; transport expense refers to the expenses
caused by transferring commodities through highway, railway and other approaches; while, logistics
management expense is calculated by the total of storage expense and transportation expense multiply a
fixed ratio which is ascertained by the experts, according to the historic conditions. However, whether
the issue fits for the Chinese characteristics, still needs further verification and deep study.
2 The formation mechanism of logistics cost
The logistics cost connects closely with distribution activity, therefore, it is necessary to recognize the
relative distribution activity, when discuss the logistics cost. In essence, logistics is the service process,
and it can create the value, when it links with the relative operative activities, according to the value
chain theory. “For any Commercial organization, producing the orders and carrying out the orders is the
cardinal principle”, and we take this thought as the instructions, when analyze distribution activity, we
relate closely the distribution activity to the order flow, decomposing and determining the valuable
distribution activity, calculating the expense of distribution activity. The related logistics cost should
include the following parts:
1) Beginning from the selling and ordering activity, it embraces the processing of relative orders
information, the pricing of commodities, and the recognizing of sale expense.
2) Make logistics plans according to the orders. These plans include material pulling plan, storing plan
and the purchasing plan of merchandise, and so on.
3) Storage is an important part of logistics activities, which is driven by the orders and plans, including
some concrete activities such as carrying, packing, storing, etc.
4) It is the main ingredient in the logistics activities of which the purchasing activities based on the
orders. Therefore, the logistics activities of manufacturing industries trans-cross some functional
department of purchasing, storing, planning, producing, sailing, transporting, etc. From the angle of
activities causing logistics cost, we have some idea about the composition of logistics activities and
source of logistics cost. The logistics cost is resulted by the relative activities of manufacturing,
supplying, distributing, which embraces the following expenses:
rganizational cost of commodities sale, including salary, management expense, material cost, and
information processing expense, etc. It is important that general goal of logistics cost should fit for the
service level of customers, which should be determined by the pricing information of products.
The information processing expense, which refers to the relative information processing in supply
chain, embracing purchasing, producing, transporting, and so on.
Transporting cost, including the salary of transporting workers, transporting management cost, the
spoilage expense of material, and depreciation charge of transport equipment, etc.
Storing cost, including the salary of storing staffs, the management cost of inventories, packing
expense, the depreciation charge of storehouses, premium, etc.
Producing cost, including some expense in the manufacturing process, such as material cost, the
salary of producing workers, the depreciation of manufacturing machine, maintaining expense, and so
on.
Purchasing cost, which refers to the whole cost in purchasing, including the salary of purchasing
staffs, management cost, business operational cost, etc.
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3 The problems in the management and control of enterprises’ logistics of China
Along with the social and economic development in China, Chinese market is becoming more and more
mature, especially, after decades of technology alteration and structure reform of enterprises, it becomes
more and more difficult to get adequate benefit from the basic production factors, such as labor force,
land, raw material, etc., and it becomes more and more narrow and limited to gain the developing space
of enterprises by cutting the raw material and labor cost, and promoting the productivity in
manufacturing process. However, it’s a common phenomenon in Chinese enterprises that the supply
chain of logistics is not smooth, and distributing cost is too high, specifically, there are several
limitations in logistics cost management and control:
1) Logistics facilities fall behind. Concretely, it embodies two facets: firstly, the inner logistics facilities
and logistics technology of enterprises are backward. Recently, most of the Chinese logistics enterprises’
basic equipment and distributing approach is far from the developed countries, and informationization
level is quite low, especially in some techs, for instance, storage, transportation, distribution, etc., and
the main approach is still manual, which increases the logistics cost, and lowers enterprises’ competitive
ability; secondly, the whole social basic logistics facilities are demoded. For a long time, the investment
in social basic logistics facilities is deficient, and the basic logistics facilities cannot been well
coordinated with the rapid development of the logistics industry; meanwhile, the layout of basis logistics
construction in China is irrational, of which, 54% scatters in the east part, 30% scatters in the central
section, 16% scatters in the west part. It heavily affects the logistics cost management and control of
Chinese enterprises and it’s the main cause which results in the higher cost of storage and distribution.
2) The degree of logistics informationization is lower. In spite, the development of information and
communication in China is rapid and has a great success, and the application of information technology
in logistics is inadequate, which is the important factor leaded to the higher cost of logistics. Recently,
the logistics technology falls behind the level of developed countries, embodying in hardware (such as
basic facilities) as well as software (such as technology). For instance, some enterprises, especially some
traditional distributing corporations, encountered great problems such as lacking of funds investing in
logistics basic equipments, backward in distributing approaches, and the lower level of
informationization etc., which caused a higher logistics cost and could not meet with the goal of
providing the maximized value-added service for customers and pursuing fast reaction. On the other
hand, the lower level of informationization will result in the lower management level of logistics.
3) Logistics management level is low and the inner structure is in bad order. Because of the
backwardness of informationization, some advanced management approaches can not be popularized in
some logistics companies. What’s worse, as the limitation of industrialization, it baffles the development
of logistics, and the reasonable layout of logistics facilities. The low management level caused the low
level of logistics cost control, even resulted in the cost rising. However, many corporations
reconstructed their logistics management system, the mutual connection of inside structure could not be
raveled, and the mechanism design was neither scientific nor coordinated. Logistics management is still
under the straight-lined structure (or functional structure), but never from the respective of supply chain,
and some functional departments , such as producing department, distributing department, supplying
department, are divided without any connection, which makes the integration of the relevant
departments difficult and makes the effective inside transfer impossible.
4) Third party logistics lags. It can minify the logistics cost in large number, and improve the quality and
standard of logistics service, and consolidate the core business, by utilizing the specific and
systematized service and resource. However, the third party logistics in China is in the developing stage,
needing further perfection. The scale of the third party logistics is small, the market is dispersive, the
management level is low, and lacking of standard operational procedure. At present, there are many
domestic corporations named “logistics”, but of which, can provide realistic and systematic logistics
service, are few.
4 The approaches of strengthening the logistics cost management and control
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4.1 Set up modern logistics ideology, and improve the enterprise logistics management system.
For perfecting logistics cost management and control, we should first set up modern logistics ideology,
check the logistics system and logistics approaches again, absorb advanced logistics management
technique, and look for the optimized means based on corporations own situation. To reduce logistics
cost, we should focus on establishing effective logistics mechanism and ensure the virtual management
and control from the organic structure, and establish the specific department to carry out the logistics
management, and realize the specification of logistics management and control.
4.2 Construct highly effective logistics system.
Based on the principle of cost and profit opposing, the emphasis of reducing logistics cost is cutting the
logistics cost from the angle of the macrocosm, rather than focusing on any specific aspect. That is,
when design the logistics management structure, we should connect all the departments and consider
them as a integration, and realize the whole reasonability through the optimized structure and effective
operation system, fully utilizing the efficiency and function of systematization. Concretely, constructing
logistics system refers to four aspects, that is, setting up logistics network, founding activities system,
establishing transporting system, and constituting distributing system. The so-called Logistics network,
in fact, is the logistics center. Not all of the corporations should be necessary to establish logistics center,
whether or not, it depends on concrete conditions of individual enterprise; while, founding activities
system should connect the relationship of respective operation procedure, and designing reasonable and
effective activities system; besides, it is how to construct transporting and distributing system. In order
to promote the efficiency in furthest, the key question is that how to transport, by which route to
transport, and by which approach to distribute. In present conditions, the question of distributing
system’s efficiency should be paid more attention. As the development of logistics approach, it requests
the companies to adopt more effective and economic distributing way. However, on other hands, the
high-frequency and small-unit approach will block the corporations developing large-scale logistics and
utilizing scale-effect, and will cause a great waste of resource. Then, how to settle the mutually
contradictory problem? The best availed way is that, several corporations use the logistics facilities
collectively and implement the policy of conjunct distribution, by integrating small-scale of few
companies into large-scale distribution.
4.3 Construct modern information system and cut logistics cost effectively.
Modern technology, especially the advanced e-communication technology, changed the traditional
commercial model, and altered the logistics operational approach. Modern informational technology
shortens the space-distance in unprecedented way, which can make corporations gain the opportunity of
development in the fastest way and react rapidly, by sharing the information resource with the suppliers
and customers. Contrasting with the conversational communicational approaches, it can not only lessen
the reacting time and cut the lagging time of commodities in each procedure, but also promote the
precision of information transfer, which makes the relevant logistics decision be more scientific and
reliable. The application of modern e-communication technology in logistics management and control
can improve storing and transporting efficiency and depress the spoilage. The modern information
system adjusts the logistics plans according to different conditions and different needs, through
transferring the intension, quantity, and price of the orders in information network, which makes it
possible to control the logistics cost from the angle of the whole corporation.
4.4 Formulating third party logistics tactics.
In order to effectively control the logistics cost, the common approach in Europe and America is the
so-called third party logistics. Its basic characteristic is that give the function of logistics management to
the outer distributing corporations, storing corporations and the third party freighter (called the third
party). The third party logistics can save large number of transporting expense, and bring benefit from
efficiency caused by taking the advantage of specialization. In addition, decreasing of unexpected events
and extra-expense should strengthen maneuverability of activities and the predictability of supply chain.
In fact, the third party logistics can not only cut the logistics cost, but also promote the service quality
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and activities efficiency.
5 Conclusion
In fact, the ideology of modern logistics cost control derives from military. During the Second World
War, the American navy initiated the logistics management because of the transfer of huge military
material. After the Second World War, because of the oil crisis in 1970s, it resulted in the cost of raw
material and labor rising rapidly, and the common commercial interest shortening. Therefore, it’s
impossible to obtain the first benefit and the second benefit through cutting cost and elevating
productivity, then, a new management method oriented logistics cost control came about, which aimed
at obtaining “the third benefit” by reducing logistics expense, that is, the logistics cost management.
Subsequently, as the coming of globalization and the development of information technology, the theory
and method of logistics administration has got the further achievement.
Along with the market competition aggravating, it’s known to enterprises that they can obtain the third
benefit by controlling logistics cost, so we can say, logistics cost control relates to the core competition,
and is the bottleneck that will affect the further development of enterprises. However, because of the
imperfection of the relative research and the limitation of actual operation, the logistics cost
management needs further research.
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