CC BY
6OPPORTUNITIES OF LOGISTICS IN DECREASING FINAL COST OF PRODUCTS
Abstract
The paper deals with a problem of long supply chains due to inclusion of redundant logistic intermediaries. The author shows pricing mechanism in supply chains and possible ways of decreasing final price of goods.
Keywords
logistics, supply chains, commodity price, regional logistic center
AUTHOR
Alexander Nosov
PhD in Economic, Associate Professor head of Economic and Human Resources Management Department Vyatka State University of Humanities Kirov, Russia
The movement of material streams from initial producers to ultimate users happens in logistic channels representing set of participants of merchandising. Supply chains of various configuration and length can be formed In logistic channels. Lengthening of supply chains happens due to appearance of additional intermediaries.
Let's consider the processes, where number of intermediaries influences on final price of a product in supply chains.
For descriptive reasons we enter the following designations:
□ - producer (P);
o -intermediary (W);
A - consumer (C);
^ - transportation (T);
CP -price set by producer;
CT - transportation cost;
CC - price for consumer;
CW - price of intermediary services.
Let's consider supply chains of different length:
1) Direct delivery:
□ ^ A;
Cc = Cp + Ct.
Transportation cost is defined in rT proportions depending from goods cost, where all expenses including insurance and forwarding of freights are considered. Then
Cc = Cp + rT Cp = Cp (1 + rT).
If transport tariff of rT = 20% of freight cost, then Cc = 1,2 Cp.
2) Delivery through an intermediary:
□ ^ o ^ A; Cc = Cp + Cti + Cw + Ct2,
where Ct1 = rT1 Cp,
Cw = rw (Cp + Cn) = rw Cp (1 + rn),
CT2 = rT2 (Cp + Ct1 + Cw) = rT2 (Cp + rT1 Cp + rw Cp (1 + rn)) = = rT2 Cp (1 + rn) (1 + rw),
ISSUE 3, 2015
143
rw - extra charge of intermediary,
rTi - rate of first carrier,
rT2 - rate of second carrier.
Each subsequent stage of supply chain take into account product price with cost of the previous operations. Product price Cc at chain exit will be defined the following way for a consumer:
Cc = Cp + Cti + Cw + Ct2 = = Cp + rti Cp + rw Cp (1 + rTi) + rT2 Cp (1 + rTi) (1 + rw) = = Cp (1 + rT1) (1 + rw) (1 + rT2).
To compare to direct delivery we will conditionally take equal rates norms of all participants of m = rw = rn = 20%
Cc = 1,23 Cp = 1,73 Cp.
Thus introduction one intermediary in supply chain increases consumer's product price at 1,44 times.
3) Two intermediaries in supply chain:
□ ^ o ^ o ^ A;
Cc = Cp + Ct1 + Cw1 + Ct2 + Cw2 + Ct3.
In comparison with the previous case Cc increased at Cw2 + Ct3.
Let's take product price as Ccw in case of delivery through one intermediary. Then for the considered delivery chain we have
Cc = Ccw + Cw2 + Ct3.
Price of services of the second intermediary Cw2 will be defined as following Cw2 = rw2 Ccw = rw2 Cp (1 + rn) (1 + rw) (1 + rT2).
At exit of the second intermediary product price Ccw2 will be defined as Ccw2 = Ccw + rw2 Ccw = Cp (1 + rT1) (1 + rw) (1 + rT2) (1 + rw2).
Similar way cost of the last transportation Ct3 will be defined as T Cwi, i.e. Ct3 = rT3 Cc w2 = T Cp (1 + m) (1 + rw) (1 + rT2) (1 + rw2).
The final consumer's price with delivery Cc is defined as
Cc = Cc w2 + Ct3 = Cp (1 + m) (1 + rw) (1 + rT2) (1 + rm) + + r T3 Cp (1 + rT1) (1 + rw) (1 + rT2) (1 + rw2) = = Cp (1 + rT1) (1 + rw) (1 + rT2) (1 + rw2) (1 + r73).
For norm of rates of all participants m = rw = 7 = rw2 = rT3 = 20% we have
Cc = 1,25 Cp = 2,49 Cp.
Thus:
- by direct delivery product price is Cc = 1,2 Cp;
- by delivery through one intermediary product price is Cc = 1,73 Cp;
- by delivery through two intermediaries product price is Cc = 2,49 Cp.
Inclusion of each new intermediary in supply chain increases product price for consumer at 1,44 times, i.e. almost at 50%.
Generally, if to accept rates of identical operations of different operators of supply chain equal to each other, product price with n intermediaries will be determined by formula:
Cc = Cp (1 + rT)n+1 (1 + rw)n, And if rates of return of all operators are identical and equal to r, product price will be defined as
Cc = Cp (1 + r)2n+1.
From the reasoning given above, we can see that identical operations, which are at different distance from producer, have the different cost increasing with speed (1 + ron) for each subsequent operation of supply chain.
Partially it explains higher costs of logistics in Russia as the main producers are abroad and products get to us with already considerable margin of previous operations. To lower logistic expenses, it is necessary to develop own production.
If all stages of material stream movement is Si, i = 1, 2, ..., m, where m is a number of stages, coefficient of product price growth is 1 + ri, then price at an output stage is defined as:
m
cc = cPn(1 + n). ¿=i
If to accept that any stage corresponds to work performed by corresponding intermediary or logistic operator and each of them uses general for the sake of appearances business rate of return r, product price for consumer will be equal to:
Cc = CP(1 + r)m.
As the rate of return in 20% for business is seldom a limit, and number of participants in supply chains given in our example (five) is not a limit, it becomes clear why product price for consumer many times exceeds selling prices of producer.
Reduction of supply chain lengths in these conditions becomes the most urgent task for economy in general and for logistics in particular.
How it is possible to simplify supply chains in the conditions of market economy? For this purpose, it is necessary to create the system mechanism of self-regulation of merchandising participants. It is possible to offer several approaches.
1. Use of transparent pricing mechanism.
In this case, consumer have calculation of product price or estimate of expenses, which reliability if necessary can be controlled. Providing doubtful data has to be perceived as violation of business ethics and will entail loss of trust among partners that finally will bring unfair participants out of logistic activity.
2. Introduction of product's "logistic passport".
Logistic passport is a document attached to product from the moment of its release by producer, where transitions of property right on product and its price are reflected. Each new product's owner makes additional record about executed operations and establishes new selling price. Such document reflecting history of product's movement would allow to receive reliable picture about material streams, acting logistic operators and their efficiency.
3. Establishment of limit prices by the state.
The method can be used for socially significant products. Introduction of limit price will not give excess intermediaries the chance to get profit that stimulates creation of the shortest supply chains as profit of logistic operators will be in inverse relationship from their number.
4. Establishment of limit logistic component in product price.
In this case, product price will depend on producer's price and general logistic margin. The margin will be distributed between participants of supply chain, and the longer a chain is, the smaller share will fall on the certain participant. Logistic operators will be interested in exception of excess intermediaries and shortening of supply chains.
5. Creation of regional logistic centers network.
The Regional Logistic Center (RLC) (Nosov, 2007) represents logistic operator, since level 3PL according to the standard classification. The operator renders a wide range of logistic services on commodity market. According to the destination, RLC are compelled to unite participants of supply chains, and thus, to develop towards 4PL operator, and further towards 5PL operator.
Having functions of system integration of supply according to business logic, forces RLC to be engaged in their optimization, decrease of logistic costs from their beginning up to the end.
ISSUE 3, 2015
145
RLC network should not be formed spontaneously. The state policy in this area is necessary. Uniformed requirements to RLC, standards of their services have to be developed. It is necessary to design spatial structure of RLC network within the state. It is necessary to involve experts, scientists, government, business for it. RLC should not turn into wholesale and trade bases. It is necessary to allocate them substantially with information and analytical functions. It is important to provide availability of RLC services for both large buyers and certain retail consumers.
RLC in regions help to organize Internet product trade, using possibilities of RLC on their fast delivery and ensuring after-sale service. The increase of consumers' number gives for RLC additional opportunities in the field of increase of activity efficiency at the expense of scale.
However, it is necessary to consider that on the way of wide use of RLC there is a set of obstacles:
1. There is no governmental body, which deals with this problem;
2. RLC is seen by large business as a potential competitor and threat to own welfare;
3. Network companies have own logistic chains, which they do not want to give to outsourcing;
4. Transport companies are not interested in reduction of distances of product delivery;
5. Creation of RLC demands the considerable amount of financing not only for construction of facilities, but also for scientific researches of regional features;
6. Potentially interesting places under construction, as a rule, are sold or have no necessary infrastructure;
7. Discrepancy of transport availability, capacity of roads, their qualities to goods traffics can complicate RLC functions;
8. Lack of the suitable qualified labor meeting RLC requirements and shortcoming of logistic managers prepared.
The list of problematic issues can be continued. However, the issues need to be solved. On this way, the distinct policy of the state in the field of logistics is important.
Management of supply chains integrally is entered in concepts of optimum control of economic systems (Nosov, 2014). The special effect in decrease of cumulative expenses in supply chains has synergetic interaction of logistic activity subjects included in these chains (Nosov, 2013).
Many foreign scientists emphasize the exclusive role of logistics in country economy. J. Stock and D. Lambert (Stock, Lambert, 2005) noted that about 10% of GNP belong to the USA logistics.
By our estimates (Nosov, 2010) potential market capacity of logistic services for Russia comes nearer to 1 trillion euros. It is time for our state to pay a close attention to this area of economy that would allow to solve many economic problems and make goods more available to population in the social plan!
REFERENCES
1. Nosov, A. L. (2007) Regional logistics, Moscow, Alfa-Press publishing house.
2. Nosov, A. L. (2014) "Concepts of optimum control of economic systems", XII All-Russian meeting on problems of management VSPU-2014. Institute of problems of management of V.A. Trapeznikov of the Russian Academy of Sciences, pp. 6107-6115.
3. Nosov, A. L. (2013) "Synergetic interaction of subjects of logistic activity", Logistics today, No. 1, pp. 18-29.
4. Stock, J. R. & Lambert, D. M. (2005) Strategic management of logistics: The lane with English, Moscow, INFRA-M.
4. Nosov, A. L. (2010) "Analysis of a condition of the market of logistic services and way of its development", Logistics today, No. 3(39), 2010, pp. 150-156.
