Calculation of reductions in transportation costs

Question

Hey there,

I wonder why it is reasonable to calculate the savings resulting from a consolidation of suppliers by simply multiplying the 20% with the 20m transport costs. The transportation costs of 20m are based on Y3, where the client has 660m in revenue. If we're cutting out the low-margin category (price <5 EUR) that accounts for 15% of the revenue in Y3, we clearly sell less units, therefore having a lower number of deliveries. In my understanding, this should lead to lower transportation costs (less deliveries >> less transporation costs).

While our client sells less entities, we assume the same transportation costs which is hardly reasonable imo.

What do you think?

Best regards

Answer 1

Hey Yannik!

I think that eliminating the low-margin category will, in fact, result in fewer units sold and fewer deliveries if it accounts for 15% of total revenue. Since fewer deliveries would naturally result in cheaper fuel, labor, and logistical costs, fewer product volumes should translate into lower transportation costs.

But the computation you mention, which multiplies the 20% by the transportation expenses of $20 million, appears to be a simplified method, probably intended to estimate possible savings without delving into intricate specifics. I think that generally a more accurate approach would include:

Accounting for the decreased volume: Calculating the effect on the total shipping volume of removing the low-margin goods, proportionately modifying the cost of transportation: and figuring out the reduction in transportation costs based on the portion of units that aren't being sent. Your transportation cost savings computation will be more accurate if it accounts for other cost-driving elements such as fixed logistical costs in addition to the fewer deliveries.

Hope this helps.

Alessa :)