Calculating Logistics Cost Reduction Through OTIF (On-Time and In-Full) Delivery

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Calculating Logistics Cost Reduction Through OTIF (On-Time and In-Full) Delivery

On-time and in-full (OTIF) delivery, sometimes also referred to as Delivery In-Full, On-time (DIFOT), is an important measure of logistics efficiency. 

Better OTIF performance can lead to a streamlined supply chain and greater customer satisfaction.
It doesn’t happen overnight though, and it will definitely cost you some effort and expenditure.
There’s a bigger cost to not getting better OTIF performance however, and if you’re not working toward it, you’re probably losing way more than you bargained for.

Missing the OTIF mark can lead to unplanned — and unnecessary — expenses.
They’re usually the outcome of poor shipment ETA predictability, penalties on missed delivery windows, the cost of resupplying damaged goods, or offsetting inherent inefficiencies by carrying safety stock.

Logistics costs alone can form a large part of supply chain operation’s expenses, sometimes up to 10% of sales revenue. Reducing logistics costs directly adds to the bottom line, which is why improving operational efficiency and supply chain predictability are important, especially for a company that’s serious about staying financially viable.

Let’s examine the logistics cost reductions that are possible when you achieve OTIF, both the direct/tangible savings and indirect/intangible cost savings.

1. Tangible Logistics Costs


Tangible costs fluctuate with shipping volume. Scope for savings are easy to quantify, but not as easy to act on.
Some of the most important tangible expenses with scope for logistics cost reduction include:

  1. Transport Cost Reduction
    Transportation and logistics management costs form a large part of a company’s logistics spends — sometimes up to 50% — which includes spends on fuel, inventory storage and handling, labor, and even the cost of expedited shipping to fulfill orders that weren’t delivered in full, on time.

    Lower transportation costs don’t just matter to the logistics company, they matter to customers as well; this cost is often passed on to the customer and affects the price of goods and services downstream.

    Assuming you’re saving 10% of your transit time, a simple formula to gauge the scope for transport cost reduction is:

    10% Reduction in Transit Time = (100% - 10%) * (Cost per trip * Number of Trips)

    While the actual transport cost reduction possible could be just a percentage of this value that’s negotiated with a transporter or logistics service provider, the cumulative savings could be significant.

    b. Detention Cost & Demurrage Cost Reduction
    Demurrage charges and detention cost are usually the result of poor supply chain visibility, especially when there’s no clear communication about when shipments or equipment are ready for pick up, lay idle, or simply missed their windows of delivery.

    With good supply chain visibility solutions in place, it’s possible to save nearly 100% of detention costs or demurrage charges through on time delivery.

    Even if there are unavoidable detention or demurrage charges, reliable shipment tracking and asset tracking data ensures auditability and the ability to challenge undue or excessive fees.

    c. Inventory Carrying Cost Reduction
    Safety stock or buffer stock is an integral part of strategies to prevent supply chain disruption, they’re a go-to strategy to counter supply chain unpredictability. While they do help fulfil orders in times of crisis, they also lead to added expenses that lean inventory management and just in time inventory operations would be better off without.

    The scope for inventory carrying cost reduction depends on the level of supply chain visibility and predictability. Managed effectively however, inventory carrying costs can be reduced proportionally with delivery time.

    If the reduction in delivery time is X%

    Lower Inventory Carry Cost = (100%-X%) * Inventory Carrying Cost

    If you can plan and manage operations effectively enough to reduce lead time and reliably hit a window of delivery, there’s no need to maintain excess inventory, which not only reduces operational overheads like warehousing and handling costs, but also improves liquidity in operational budgets, all of which ultimately add to the bottom line.

    d. Working Capital Reduction
    Working capital is an integral part of day-to-day operations, it helps companies handle expenses like procure raw materials, pay transporters, and handle unexpected expenses while still maintaining liquidity in a company’s finances.

    The easiest way to reduce working capital is to collect receivables faster than payables go out.

    Managing delivery lead time and better on time delivery mean you can collect customer payments before working capital loans are due. Clearing working capital loans early reduces the amount of interest paid on future installments, savings that add straight to the bottom line.

    Assuming you’re shipping goods worth X, a simple formula to gauge the scope for working capital cost reduction is:

    Working Capital Interest Reduction = (X * ( Number of days saved * % Borrowing rate /365) * Number of Shipments made

2. Intangible Logistics Cost Savings


Intangible costs don’t necessarily fluctuate with shipping volume, and the scope for savings isn’t always easy to quantify — but they do exist.

There may also cost saving measures that can be counterintuitive to account for.

Reducing logistics costs in one area like minimizing safety stock could lead to additional costs in other areas like expedited shipping during a stockout, or worse, lost business opportunities, all of which could lead to higher total logistics costs.

Some of the most important intangible expenses with scope for logistics cost reduction include:

  1. Cost to Serve & Customer Retention Costs: 
    More often than not, just 20% of your customer base accounts for 80% of your sales/shipping. These 20% may not even be your most profitable customers. It’s important to understand both the direct and indirect cost to serve a customer that demand the most of your resources.

    Assume any one of these key customers brings in, let’s say, $10M in annual revenue.
    You risk losing that $10M worth of business next year if your OTIF run rate is inconsistent.
    Every time you’re penalized for missing the window of delivery, every time you don’t meet that client’s service expectations, every discount you need to give them to make up for bad service, every sales person that you have to send over to placate and reassure the client, it all costs you.

    Delays in payments can cost you dearly as well.

    Imagine the customer withholds a $10M payment for two weeks because you haven’t delivered in full or still need to replace some damaged or missing inventory. A 15-day delay in recovering working capital (@10% borrowing rate) will cost you an extra $4,000 in interest.

    And that’s just one of your customers.

    It’s probably easier to shore up your service quality and work toward minimizing spends while maintaining customer satisfaction. Better efficiency and lower overheads don’t just reduce operating costs, they add to your bottom line.

  2. Speed to Market & Lost Opportunity Cost
    The biggest casualty of logistics cost reduction strategies isn’t always the quality of service, supply chain agility also suffers.

    Companies are often insolvent due to tied up working capital or customer payments that are delayed (or short) because of delays in delivery. Without effective on-time and in-full (OTIF) strategies, these companies cannot react to changing trends fast enough and tend to lose out on market opportunities that may arise due to shifting consumer demand.

    Imagine an FMCG company that’s waiting for a $100M payment. I
    t’s overdue because their end outlets are still waiting for confirmation of delivery, and the containers are held up at a sorting facility because they missed their window of delivery. What’s worse, there’s no staff available to handle unloading and repackaging for at least 2 days.

    Not only is the FMCG company paying an additional $40,000 in interest (@10% borrowing rate), but they also need to borrow more working capital in a pinch to, say, capitalize on a spike in demand for one of their brands after a competitor’s product was recalled from the market due to a salmonella scare.

  3. Additional Procurement Costs : 
    Without effective measures to ensure on-time and in-full (OTIF) delivery from remote suppliers, companies can’t take advantage of lower material or processing costs by offshoring or near-shoring their needs.

    Procuring from low-cost suppliers overseas is a huge opportunity to reduce material costs and improve the bottom line.

    There’s a caveat to that however — the massive lead time involved.

    When goods are shipped from distant shores, they could take anywhere from a few weeks to a few months before they arrive. To offset the uncertainty in lead time and OTIF, companies need to spend extra on nearshoring. They rely on shipments of the same goods from a closer, faster — but more expensive — source for their safety stock in case there’s a delay.

    While that may help offset the effect of delays, the additional cost of procuring and maintaining safety stock — from a more expensive source to boot — chips away at overall margins.

    With better OTIF management, you could set delivery schedules that avoid stockouts as well as minimize the need for buffer inventory sourced from more expensive centers.

    If you need to maintain $10M worth of stock, 10% of which is procured from nearshore centers (@30% markup), you could be saving upwards of $230,000 just on the buffer stock.

How to Improve OTIF Delivery Performance?


Consistently good OTIF performance is important. In an age of ecommerce and Amazon same day delivery, today’s B2B customers expect more for less, and they’re unforgiving when orders get delayed or mixed up, especially if they’re paying extra for on time delivery. To reduce lead time, ensure OTIF, and minimize logistics costs, start by ensuring predictability on ETA.

Predicting accurate ETAs for commercial shipments isn’t easy. Besides the basics like traffic and weather, several things can affect shipment transit time from the point it’s dispatched up until it’s delivered. Factors like vehicle or mode of transport, the number of legs involved, as well as the usual snags that affect multimodal shipments – there are several blind spots that can derail even the most well-planned transportation timelines. That’s where the art of ETA prediction through supply chain visibility comes in. There are inexpensive cargo tracking solutions that combine the best of both warehouse management systems (WMS) and transport management systems (TMS) to help track and analyze movements throughout a supply chain.

They’re also better because they are automated, making them more efficient and accurate compared to older, siloed tracking and management systems that relied on manual or semi-automated processes to log data. Through constant communication, analytics that account for more variables than just traffic and the weather, as well as live alerts when unexpected delays do occur, a good cargo tracking system can:  

  • Predict more accurate ETAs based on past performance and current conditions, giving you a better idea if shipments will make their window of delivery.
  • Generate early warnings in case of delays or disruptions, giving you enough of a head start to counter them before they affect the bottom line.
  • Plan delivery schedules, manage supplier lead time, and reduce safety stocks more effectively, allowing you to run a lean supply chain and just in time operation with better reliability.
  • Help challenge detention or demurrage fees levied for delays that were beyond your control, reducing unfair liabilities in case delays do occur.

A good shipment tracking system can give supply chain managers early warnings about disruptions, a better idea of operational efficiency, and more importantly, they help identify areas where spends could be reduced further.

Companies can reduce logistics and inventory spends by using effective supply chain visibility solutions to predict more accurate ETAs and meet more aggressive delivery performance KPIs.

We’re glad to empower you with what you need to get your ETA prediction right over lunch.
Talk to a Roambee Expert


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