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How To Reduce Your Logistics Costs With Route Optimization

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  • Post last modified:January 19, 2023
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1) How to reduce logistics costs with route-optimization algorithms

Optimizing “efficiency” is the ultimate goal for any business. It is the end-goal metric that ensures a balanced approach. Only then can businesses run profitably across decades.

While businesses do focus on critical areas such as Capex and ROI, labor efficiency, stringent quality tests, and effective sales and marketing, there tend to be areas that often get overlooked. Routing, perhaps, has been one such aspect for several years now. Poor logistics can result in inflated costs in several areas (e.g. fuel, delivery times, poor space utilization, and poor supply-chain management). The most alarming consequence of this is higher—and unsustainable—pricing for the end customer. 

Route optimization identifies the most efficient route for daily deliveries. Remember, it isn’t the fastest, cheapest, or shortest route, but the one that balances numerous variables to achieve the most cost-effective and efficient delivery scenario. The idea behind route planning is to maximize the efficiency of delivery routes in order to enhance the entire supply chain.

2) The costs of poor logistics and inefficient routing

To understand the harmful effects – financial and otherwise – of inefficient routing, let’s look at some of the costs.

i) Fuel-cost: Excessive fuel consumption is a huge drain on your operating costs. Don’t forget that fuel consumption is almost always the single biggest line item in the operating cost of a delivery firm. 

Poor routing means unnecessary miles traveled, thereby burning more fuel dollars than required as well as prolonging delivery times. You’ve gone both ways.

Fuel wastage doesn’t just cause wasted dollars – it also results in idling engines, and extra wear-and-tear on engine parts, both of which add to unnecessary operating-cost.

ii) Harmful environmental impact: In modern times, the costs of poor route optimization have much larger (harmful) ramifications i.e. damaging the environment! You would soon get tagged as a company that doesn’t care for sustainability or its carbon footprint.

In an overwhelming evolution of consumer sentiment in this century, they are most concerned—and aware!—of a company’s position on protecting the environment. If your consumers perceive you as “polluting” or “environmentally damaging,” you’d probably fall out of favor pretty quickly! It really is getting to that stage!

iii) Cost of labor: Poor routing logistics would translate into inefficient operations. That would require more people to achieve the same results by expending additional resources, work hours, and funds. Logistical inefficiency is directly costly.  Salaries are a leading line item in your operating costs. 

Also, other related costs like office electricity, cafeteria services, transport, etc. would rise.

iv) Unhappy customers: Don’t forget that today’s customers are used to fast deliveries and numerous options for delivery windows and payments; they are weaned on Same-day delivery, Free delivery, and 24-hour delivery. The days when delivery times of 7-10 days have been relegated to the ashes of time…

Thus, the first casualty of a poor order fulfillment program would be lost customers. Without route optimization, you would take longer delivery times, charge your customers more for delivery, and get stuck in a downward spiral of burgeoning (or, unsustainable costs) with not enough business growth, ROI, or market share.

~ The Dreaded Domino Effect ~

Unfortunately, the ill effects of a missed deadline aren’t just restricted to “one failed delivery.” Instead, it results in a “domino effect” of delays—for you and other supply-chain stakeholders.

For example, a supplier delays his shipment to a manufacturer, who is forced to run a delayed production schedule, which causes delayed supply to his wholesaler, who delays his order to his distributor, which causes a delay for the retailer…  ~

3) Reducing logistics cost with route-optimization

Having outlined the potential losses due to inefficient routing, let’s look at the numerous benefits that will result from an effective and well-designed routing policy. 

The first step toward this is to deploy modern, automated delivery software. Without it, it would become impossible for you to achieve route optimization in today’s complex logistics world and with today’s demanding consumers.

i) Reduced fuel costs: Savings on your supply-chain costs would be significant if you could reduce your fuel costs through efficient routing.

  • Studies show that reducing about 12 miles of usage reduces about 2 gallons of fuel consumption
  • Efficient  routing also helps lower fuel consumption by circumventing traffic congestion (and, reducing engine idling)

ii) Reduced labor costs: Efficient routing means the most cost-effective and efficient way to execute your daily deliveries is achieved. Straight up, it would mean a minimum salary payout to your drivers, and another delivery-related workforce, especially if it involved overtime hours. 

iii) Best-case delivery schedules: As mentioned earlier, route-optimizing isn’t just about finding the “cheapest or “fastest” distance between two delivery points. 

A lot of it also includes assessing several other variables that constantly affect delivery times and costs. For example, analyzing weather trends and traffic patterns can help prevent problems that may arise.

Factoring in such variables will help you maintain a tight, dependable, and consistent delivery schedule. As you do it day-in-day-out, it will result in your deliveries achieving a “best-case schedule” that will minimize logistics operating costs while achieving maximum efficiency. 

iv) Lower costs = higher profitability: Well, lowering cost has a most desirable inverted effect – it improves margins, and thereby, business profits! 

Improved efficiency not only reduces the cost of operations but also helps enhance top lines and margins. With greater efficiency, you would make more daily deliveries by deploying the same amount of resources. This improves overall business ROI and profitability. In turn, you would have more dollars to reinvest in growing your business. That would enable you to reach your optimum scale as quickly as possible.

v) Using lower-costs as a competitive advantage to build customer equity: Just like unhappy customers are a cause for great alarm, you could use optimized routing to develop a competitive advantage. 

By lowering costs that would translate into lower delivery charges for your customers (while maintaining delivery efficiency), you would develop a reputation among your customers for offering a positive order-fulfillment experience. Then, not only will you become the first choice for your customers, but you may also be able to charge a premium if the buyer knows you will deliver it faster, and per his preferences (e.g. delivery window, pick-up/ drop-off location)

Conclusion: As is evident, the consequences of minimizing logistics costs through route optimization are many, including rapid scale, delivery efficiency, strong unit economics, and improved profitability. The first step is to deploy modern tech tools like delivery software to achieve route optimization.

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