Costing, Pricing and Performance Measurement in Logistics
This domain links logistics cost build-up to pricing decisions and to the KPIs used to judge performance. Numerical questions on cost per tonne-km, cost per order and break-even are common.
Costing and pricing
Costs are fixed or variable, direct or indirect. Logistics cost elements: line-haul freight, handling, warehousing, packaging, insurance, duty, inventory carrying, administration and reverse logistics. Activity-based costing assigns overhead by activity drivers (orders, drops, weight) instead of a blanket percentage. Cost-to-serve analysis exposes loss-making customers on small, frequent, remote drops. Pricing approaches: cost-plus, market or competitive, value-based, and differential pricing by lane, volume or service level. Break-even units = fixed cost / contribution per unit.
Performance metrics
- OTIF: on time and in full, measured against the agreed delivery date.
- Perfect order index: complete, on time, damage-free, correct documentation.
- Inventory turns = COGS / average inventory; cash-to-cash cycle combines inventory days, receivable days and payable days.
- Fill rate, order cycle time, damage rate, vehicle fill rate, cost as a percentage of sales.
- SCOR framework processes: Plan, Source, Make, Deliver, Return, Enable.
Worked example
A truck carries 12 tonnes over 600 km for ₹18,000. Cost per tonne-km = 18,000 / (12 x 600) = ₹2.50. If a 3PL has fixed cost ₹5,00,000 per month and contribution ₹250 per order, break-even is 5,00,000 / 250 = 2,000 orders. The reasoning: the first figure is a unit-cost efficiency measure, the second a volume threshold below which the operation loses money.
Traps that cost marks
- Averaging cost-to-serve across all customers, which hides unprofitable accounts.
- Counting an order as OTIF when it is on time but short-shipped.
- Using sales value instead of COGS in the inventory turnover numerator.
- Treating freight paid to a third party as a fixed cost.