The Total Cost Concept and Logistics Systems Analysis

Total Cost Concept

Logistics management’s total cost concept is based on the interrelationship between logistics and production expenses.

Costs associated with warehousing, inventory, transportation, industrial planning and ordering, and other logistics services are inextricably linked.

A change in any of these activities will affect the others. Attempting to reduce any single cost aspect may increase total logistics costs. As a result, any suggested change to a logistical activity should be weighed against the entire logistics cost.

For example, while limiting inventory levels may result in lower inventory costs for a business with a seasonal demand pattern, the additional costs incurred by manufacturing in adjusting output levels to match demand (either through hiring and layoffs or through some other means) may more than offset the inventory savings. A standardised manufacturing strategy may very well result in the lowest total costs. The whole cost idea is implemented through the examination of logistics systems.

Logistic System Concept

Logistics systems analysis’s purpose is to assist management in achieving their logistical objectives. Systems analysis is required to conceptualise and analyse system possibilities regarding management’s logistics policies.

Additionally, systems analysis can aid in the maintenance and enhancement of the logistics system by examining its operating characteristics and identifying opportunities for improvement through the gradual introduction of new concepts, techniques, or equipment.

As critical as it is to evaluate the logistics system holistically, organisations are rarely in a position to conduct a comprehensive re-study and reconstruction of their entire system. The cost – in terms of disruption, investment, and reorganisation — is prohibitively high.

However, the logistics system concept provides management with a framework for considering evolutionary changes, and the total system orientation of modern systems-analysis techniques provides management with the tools necessary to investigate and implement evolutionary changes that are consistent with total system effectiveness.