In logistics, an avoidable cost is the cost of an activity that can be avoided if that activity is not performed, resulting in a monetary savings. Avoidable costs are typically variable costs, while most fixed costs are unavoidable. Avoidable costs can include things such as labor costs or packaging. As an example, within a warehouse, organizational tools such as racks, are unavoidable. However, upgrading to the high-end, most expensive racking solutions is an avoidable cost when general, less-expensive racks would work.
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cost avoidance Articles
Not all supply chains are created equal - and neither are the strategies used to control them. For companies looking to protect their margins and sharpen their competitive edge, understanding where costs originate and how they behave is the critical first step toward managing them effectively.
Driven by factors such as fluctuating fuel prices, labor shortages, shifting customer demands and global disruptions, supply chain expenses can erode profitability quickly if left unchecked. Taking a structured, strategic approach to cost management is no longer optional; it's essential.
There are three fundamental approaches to reducing and controlling supply chain costs: avoidance, mitigation and improving performance. Understanding each helps companies to decide which is more likely to deliver the most bang for the buck within their supply chains, and what measures need to be taken to capture the full benefits.
1. Avoidance
Cost avoidance is achieved through structural change in the organization, explains Tracy Urbanski, senior vice president of operations for Penske Logistics. "You might have employees who are focused on transportation management, for example, but the team is not centralized or coordinated, and there is an opportunity to deploy them more effectively," she says.
In such cases, the company must pinpoint the gaps in organizational performance and identify best-in-class solutions. Often, it is easier for the company to explore these options with a third-party logistics provider (3PL) than to undertake an in-depth review internally. Outside eyes can offer a unique perspective that may be difficult for people entrenched in the day-to-day to see and may also offer insight gained from working in other industries.
Another route to cost avoidance is to review and rationalize the enterprise's technical resources. For example, rather than making significant investments in advanced transportation management system (TMS) technology, an enterprise might choose to outsource that function and engage a system managed by a 3PL. When companies work with Penske, "they can take advantage of the investment dollars in our system and the in-house expertise we have to run it," says Urbanski.
This approach can be especially advantageous when existing solutions are not delivering sufficient value. An example is a software-as-a-service solution that fails to provide the analytics or data visualization features required to adequately support the company's supply chain management goals.
2. Mitigation
Where cost avoidance focuses on structural changes, mitigation takes a more proactive, operational stance - targeting the risk factors and inefficiencies that quietly erode profitability before they escalate into larger problems. Mitigation measures address issues before they impose an unnecessary cost. "We might provide better network visibility tools that enable the company to track inventory more efficiently and reduce the amount of product it has to handle and store," explains Urbanski.
Other cost mitigation strategies include increasing the reliability of a distribution network or using predictive analytics to streamline decision-making in the supply chain.
Raising the efficiency of a distribution network can translate into improved on-time delivery performance and, in turn, dollar savings in the form of reduced penalties for late deliveries - a growing concern as retailers and e-commerce customers tighten their service level requirements.
Better decision-making delivers cost savings on many fronts. Consider a company that is preparing for a peak in demand. The ability to make more informed decisions helps the company to secure carrying capacity for the surge in shipments ahead of time "at more competitive rates compared to what they would have paid without the intervention," Urbanski says. In an era when capacity constraints can emerge with little warning, this kind of foresight can mean the difference between meeting customer commitments and falling short.
3. Performance Improvements
While avoidance and mitigation address structural and risk-related costs, performance improvement zeroes in on day-to-day operational execution - optimizing what's already in place to squeeze out inefficiencies and drive measurable gains.
In this approach to cost reduction, companies can focus on the current state of the supply chain and opportunities to improve performance across it.
Network optimization falls into this category of cost savings. There are several ways to approach this strategy. Evaluating the entire network — including sourcing locations, product demand, warehouse inventory distribution and route efficiency — is a natural starting point. From there, companies can model what-if scenarios to assess how changing specific suppliers or cross-docks would impact costs and transportation times. Improved communications can also unlock efficiencies, creating better ways to build and consolidate loads across the network.
Dynamic routing, the load tendering process, and sourcing strategies are other primary areas that are often ripe for improvement in the quest to cut costs. As supply chains generate increasing volumes of data, companies that invest in the right analytical tools are better positioned to surface these opportunities and act on them quickly.
Penske utilizes leading-edge technology to help customers discover cost savings they may overlook.
Planning the Road Ahead
Choosing which approach, or combination of methods, to pursue depends on the shipper's goals and the nature of its business and organization.
"Companies that are decentralized can present significant opportunities for cost avoidance," says Urbanski. The company's time horizon sometimes impacts which approach to take. One enterprise might aim to capture short-term cost savings; another has mid- to long-term targets that can be realized by relocating distribution centers to meet customer needs better. "In general, we work to deploy all three cost management strategies," Urbanski says.
Whichever track companies take, they need to be aware of what's involved in advance if they are to derive maximum value from the exercise.
Mitigation is inherently forward-looking, and it helps if companies are "open to change and to viewing how success can be delivered by working with different tools and through change management challenges," notes Urbanski.
In cost avoidance, it's important to "spend time understanding the organization and what people do," she says. It might be necessary to delve into the fundamentals of operating a freight network and what different processes accomplish. "Companies that do this often experience the biggest transformations," Urbanski says.
The investment in time and money can be significant — but so are the potential cost savings. And in a supply chain landscape where margins are under constant pressure, organizations that take a deliberate, well-informed approach to cost management are best positioned to build the resilience and efficiency needed to compete long-term.
Ready to Take Control of Your Supply Chain Costs?
Whether you're looking to eliminate structural inefficiencies, get ahead of rising costs or optimize your day-to-day operations, Penske has the expertise, technology and industry experience to help you find the right path forward.
Contact us to explore how a tailored cost management strategy can deliver measurable results for your business.
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