Management (PDM) results in improved inventory control. It minimizes
the out-of stock situations and to know slow moving stocks. Products
range can be simplified. The cost analysis will help better decisions
because the cost will be looked at from a total point of view and no
individual cost will be looked at in isolation. As inventories will
be decided by demand, it helps in quick delivery, which means the customers
need not overstock them. As it reduces costs, the prices can be lowered
for the customers.
Distribution Cost Analysis
This has been defined
as the study and evaluation of the relative profitability or costs of
different marketing operations in terms of customers marketing units,
commodities, territories or services.
As you read earlier
in the lesson physical distribution cost in the third largest component
in the total cost of business operations. Hence there is good scope
for cost reduction in this area as it has not received the attention
due to it till recent years.
One feature of distribution
costs distinguishing them from other functional costs is that they have
to be looked upon as a unit. Indiscriminate cost reduction in any one
of the individual cost elements, such as inventory maintenance, warehousing,
transportation or clerical services, can have a disastrous effect on
the efficiency of the system as a whole e.g., if we cut inventories
it will save capital investment and the costs of supplying capital and
it may save some expenses in storage, taxes and insurance. On the other
hand a cut in inventory levels may seriously affect reliability of the
delivery service to customers. As Mr. John F Magee puts it, it saves
money but destroys competitive position.
Similarly a cut
in transportation costs will result in lack of flexibility and responsiveness
to market changes more inventories at more stock points will need more
investment and will increase the risk of obsolescence.
Again refusal to
allow any cost increase may be equal damaging. It may mean wiping out
an opportunity for improving the efficiency of the distribution system
as a whole. The use of high speed data processing and communications
may increase the cost of distribution. But they will cut down the delays
in feeding information back to production and control the lags in the
movement of materials into the distribution system in response to customer
demand. Thus they may actually cut total distribution costs.
The following is
meant to be a tentative list of various costs of distribution. They
are not exhaustive.
1. Costs of transportation
by common carrier, contract carrier or firms own transport equipment.
2. Warehousing costs in public or private facilities
3. Order handling costs
4. Packing costs
5. Inventory costs of
e) Capital invested
Ever since marketing managers began to express concern for the distribution
function the total cost approach borrowed from logistics and operations
research, many firms have achieved tremendous improvement in their performance
Even before we can
analyze the distribution costs by evolving proper criteria we face a
major difficulty. Many concerns do not collect these costs under the
separate heading of distribution costs. In actual practice these costs
are lost in unlikely cost centers or manipulated to satisfy departmental
or individual requirement. In other worth managements, as a matter of
policy may not identify distribution costs. In a recent investigation
into distribution cost in the U.K. the finding was that most firms contracted
were unable to produce a composite breakdown of their distribution costs.
In the final analysis the identified distribution costs varied from
3% to 42% of sales.
In some industries
especially perishable goods and fashion goods industries distribution
costs are critical and may represent the major trading cost.
blocks is distribution cost analysis
1. Problems is the
attempt to break down total distribution costs into specific components
2. Difficulties in apportioning these costs to different cost centers
of cost units. The common bases adopted are product groups, market segments,
geographic location, etc or a combination of these.
3. Problems in the measurement of actual cost associated with a particular
distribution activity and in the estimation of future cost in the light
of a distribution changing environment.
It is generally
agreed that the functions of production or manufacturing have been terminated
when a product has been placed in a saleable state and that the distribution
function has begun.
can broadly classified and accounted for it terms of sales departments,
territories, salesmen, lines of products, sales and production orders
and customers, or a combination of these.
To provide adequate
detail the accounting system provides the following records
1. Controlling accounts in the general Ledger to reflect the total cost
of sales division and administrative division.
2. A subsidiary ledger supporting each of the divisional controlling
accounts or recording the objects of selling and administrative expenses
such as salaries, supplies, taxes, insurance, deprecation etc.
3. Proper procedure for allocating the items of distribution costs among
territories products salesman or other desired breakdowns.
4. Budgets and standards for distribution costs.
of the accounting system described above are as follows
and accounting for distribution costs by channels of distribution, departments,
territories, salesman, orders, lines of products and customers comparative
statements being submitted to management periodically.
2. Preparation and user of standards for distribution functions to control
costs by delegating responsibility, establishing measures of efficiency
providing incentives to personnel and supplying predetermined costs
as an aid in budget preparation and formulation of pricing policies.
3. Analysis of distribution costs as a guide to management in making
current business decisions and setting future policies.