Low logistics costs contribute significantly to trade facilitation, value creation, and the enhancement of competitiveness for import and export goods. The logistics cost index is an indicator that reflects the level of trade development of a nation. For example, the ratio of logistics costs to GDP in several countries is as follows: Australia – approximately 9%, Brazil and Mexico – 15–17%, Thailand – 19% (2005), Europe – 12% (2006–2008), and China – 21.3% (2004). Vietnam’s estimated rate ranges between 20–25%.

1. What Are Logistics Costs?

Logistics costs encompass all expenditures related to the movement and storage of goods throughout the supply chain. They typically include:

Transportation costs, accounting for one-third to two-thirds of total distribution circulation costs.

Opportunity cost of capital, referring to the minimum rate of return a company could earn if its capital were invested elsewhere rather than tied up in inventory.

Inventory storage and maintenance costs, which include warehouse rental, goods preservation, handling in and out of storage, damages, and insurance for stored goods.

2. Formula for Calculating Logistics Costs

In any market, the selling price (G) of goods reaching consumers must at least cover all incurred costs (C):

G≥C1+C2+C3+C4+C5(1)

Where:

C1: Production cost — the basis for determining the EXW (Ex-Works) selling price.

C2: Marketing and operational expenses.

C3: Transportation cost.

C4: Opportunity cost of capital tied to inventory.

C5: Inventory storage and maintenance costs.

Therefore, the logistics cost (C_log) can be represented as:

Clog =C3+C4+C5
Transportation Cost (C3)

Transportation costs account for a significant share — between one-third and two-thirds of total distribution costs. Despite industry efforts to reduce transportation costs through technological innovations such as containerization, use of high-capacity transport equipment, and multimodal transport systems, fuel prices have continued to escalate, driving up total costs.

Manufacturers, therefore, must adopt various strategies to mitigate these costs, such as improving cargo density through product design and packaging optimization to maximize vehicle and equipment utilization.

Opportunity Cost of Capital (C4)

This is the minimum rate of return that a company could earn if its capital were invested elsewhere instead of being tied up in inventory. Assuming the minimum return equals the borrowing interest rate, C4 can be calculated as:

C4 = (qikv)t [(1+r)t-1] (2)

Where:

qi: Quantity of products per shipment.

kv: Capital requirement per product unit (depending on production technology).

t = 1 → m: Time units during which annual interest applies (months or years).

r: Interest rate on borrowed capital.

From equation (2), C4 depends on the capital market rate (r), production technology (kv), and inventory quantity (qi). When r and kv are fixed, C4 is directly proportional to qi. Therefore, reducing shipment sizes (qi) helps decrease opportunity cost.

Previously, when markets were smaller and borrowing costs lower, producers paid little attention to this cost. However, with expanded markets, increased production volumes, and higher interest rates, opportunity costs have become significant — compelling firms to reduce shipment sizes to control costs.

Inventory Storage and Maintenance Cost (C5)

C5 includes warehousing rent, preservation, handling, spoilage, and insurance costs:

C5 = qi.Tbq.glk + qi.k.g + Cbh (3)

Where:

Tbq: Average storage duration of batch qi.

glk: Average daily storage cost per unit.

k: Rate of damage or deterioration.

g: Value per stored unit.

Cbh: Insurance cost of stored goods.

According to (3), C5 is closely related to qi — smaller shipment quantities or shorter storage time will reduce total cost.

3. The Current State of Logistics Costs in Vietnam
3.1 Lack of Emphasis on Logistics Functions

Currently, many Vietnamese companies have not yet leveraged the full advantages logistics can provide. Some even fail to recognize its critical role in reducing production and operational costs.

Logistics interconnects marketing, production, inventory, transportation, and distribution functions. However, many enterprises in Vietnam still manage these independently — for example, transportation under administration, inventory under accounting/finance, and procurement under sales or marketing.

This fragmented organization leads to poor coordination and inefficiency. Therefore, businesses must establish dedicated logistics or supply chain departments to integrate these functions effectively.

Additionally, goods in Vietnam typically pass through numerous intermediaries — from sourcing raw materials to reaching end consumers — increasing transaction and distribution costs. Each intermediary tends to maximize its profit due to asymmetric information, inflating total logistics costs.

Moreover, the distribution system is concentrated mainly in urban areas, while rural markets are underdeveloped. Retailers often manage their own transportation over short distances. Warehouses are frequently located far from urban centers, and companies fail to distinguish between primary, secondary, and central warehouses, leading to imbalances between transport and inventory holding costs — both of which inflate total logistics costs.

Another challenge is that many firms still avoid outsourcing logistics services (e.g., customs brokerage, accounting, or 3PL services). Instead, they self-manage logistics, investing heavily in infrastructure and vehicles — which leads to high capital costs, underutilization, slow payback, and ultimately, increased logistics costs.

Vietnam’s logistics industry is developing rapidly, with many providers becoming increasingly professional. The more professional logistics services become, the lower the overall logistics costs. The key question remains: Do Vietnamese enterprises recognize logistics as a means to reduce production costs?

3.2 Weak Infrastructure

Vietnam currently has over 17,000 km of paved roads, 3,200 km of railways, 42,000 km of waterways, 266 seaports, and 20 airports. However, the transportation network remains inconsistent and often below safety and technical standards. Of the 266 ports, only about 20 handle international import/export traffic, and most are unequipped to service container ships due to inadequate facilities and lack of operational experience.

Air transport remains underutilized, with road transport being the dominant mode. Yet, road networks are narrow, congested, and poorly maintained — limiting the ability to handle heavy cargo efficiently. Many industrial zones are established far from ports or without proper road access, significantly increasing transport costs.

Rail transport focuses mainly on passengers. Due to dual-gauge systems (1.0 m and 1.43 m), railways are unsuitable for heavy freight and inefficient (e.g., Hanoi–Ho Chi Minh City rail journey takes up to 32 hours).

Inland waterway transport, though safe and low-cost, remains slow and unpopular with shippers.

Multimodal transport, which combines different modes to exploit their advantages, is still not widespread in Vietnam — another reason logistics costs remain high, primarily due to transportation.

This disparity also leads to inconsistent retail prices nationwide. Many Vietnamese businesses (especially exporters) prefer selling on FOB origin terms (ex-factory), avoiding logistics risks. However, to maintain consistent national retail pricing, companies should consider FOB destination pricing — including average transport costs to customer warehouses, ensuring equal landed costs.

In summary, to reduce production costs and product prices, logistics costs must be minimized. As of 2011, Vietnam’s logistics costs were estimated at over USD 25 billion. Therefore, even a 1% reduction in logistics costs would save the country and its businesses a substantial amount.