Control of Total Distribution cost & Supply cost
- Distribution Costs or the Distribution expenditures are the costs incurred by a corporation to make its products or services accessible to end customers or resellers. It is a wide accounting phrase that includes a variety of charges.
- Some assumptions are required for analyzing total distribution costs (TDC). These comprise the current observed pricing and transit times for normal air freight, full containerload (FCL), and less-than containerload (LCL) services.
- For every firm engaged in distribution, distribution costs are a substantial barrier. There are several distribution costs that must be addressed. Furthermore, these expenditures are not stable and may alter from time to time, affecting the distribution cost as well.
- If the shipper is a distributor who sells to the retailer, who then sells to the end user, the total distribution cost includes all of the distinct distribution charges at each step. Furthermore, in certain circumstances, the producer has a manufacturing unit in one location and the “product pick up place” for the forwarder in another. The cost of transporting the goods from the manufacturing facility to the pickup location is also included in the distribution cost.
- There are other charges that are included in the distribution costs. Inventory handling costs at all locations, such as manufacturing, storage, and sales, are included in distribution costs. Packing expenses are also included in distribution costs. The distribution manager’s pay and office expenditures are also included in the distribution costs.
- Freight charges are often the most significant component of distribution costs. If the product is created and sold in the same nation, the freight cost refers to the “Trucking” or other transportation costs incurred to deliver the goods.
- If the product is supplied overseas, it may include “Air Freight, Less than container load (LCL), Day-Definite LCL, or Full container load (FCL).” The cost of transporting the goods by air would be greater, and the cost of transporting it by LCL would be cheaper, but there is one more factor to consider: “Transit Time”. LCL transport takes longer, but air transport takes less time. There is a requirement for a comparison examination of product demand urgency and transportation cost. If the product is urgently required and the shipper is losing sales money, it is best to shorten transit time and raise freight costs.
- Distribution expenses: Distribution expenditures are the individual expenses that the firm incurs for a variety of reasons. These are singular or repetitive transactions that occur throughout time. Rent, salaries, and administrative expenditures are some examples. All of them are individual or repetitive transactions, which may be referred to as distribution expenditures.
- Distribution Cost: Distribution cost refers to a company’s total distribution expenditures. So, using the example above, the sum of rent, salary, and administrative expenditures will be deemed distribution cost. Formula: [Total Distribution Expenses] = Distribution Cost.
- 1) Sales Returns.
- If a dealer or retailer rejects a material, the material is returned to the manufacturer as long as it is within the company’s returns policy. This returned material might have been returned for cosmetic reasons (it was broken or dented) or for performance difficulties. In any case, the returned goods incurs a cost to the corporation.
- 2) Direct Sales Expenses
- Any expenditure incurred in marketing the product to the intended consumer is considered direct selling. Many manufacturers, wholesalers, and distributors use direct selling to grow into new markets. They would also wish to know the distribution costs for that location. As a result, they regard all direct selling expenditures to be the firm’s major expense.
- 3) Commercial and Accounting
- The government requires you to produce all of your sales and purchases, as well as balance and profit sheets, in order to assess your firm’s profit. Furthermore, these statements are vital for the company to track year-on-year growth and assess performance and future potential. Thus, advertising and accounts are meticulously maintained in each business.
- 4) Advertising and sales promotion costs.
- If a corporation wants to establish itself in a new area, it must use out-of-home advertising, in-store branding, and advertisements in local publications or channels. As a result, the corporation will incur significant distribution expenditures in the form of advertising and promotions.
- 5) Product and packaging expenditures.
- The product packaging was OK, but not robust. As a consequence, the package had suffered significant wear and tear by the time it reached the client, who returned the goods.
- 6) Shipping & Delivery
- With the development of e-commerce, all manufacturers are focusing heavily on delivery. The merchandise must be available in the market, whether via an e-commerce platform, a retail shop, or the distributor. Everyone understands that if there is no merchandise on display, the sale will not occur, which causes tension between the various distribution channels.
- 7) Trade discounts.
- In addition to sales promotion activities such as advertising and marketing, a firm may conduct a number of trade promotions. This involves offering incentives to retailers, distributors, and suppliers that meet specified criteria.
- 8) Market research Reputable firms such as Samsung, LG, and Sony purchase market research studies from IMRB or Nielson to enter new markets. These studies might cost hundreds or thousands of dollars. A corporation may wish to perform a satisfaction survey or a study of new distribution ideas not just in a new market, but also in an established market.
- 9) Credit, Outstanding, and Overdue.
- A distributor that works in a regional market need a significant quantity of money to do business. To arrange for this money, the distributor takes out a bank loan. This is known as an overdue account. Hypothetically, if the distributor borrows one lakh from the bank, he must repay one lakh plus one percent interest within thirty days. As a result, a dealer loses money if his money does not return from the market in a timely manner.
- 10) Warehouse storage and handling
- Warehousing is a significant expense of distribution. When a corporation develops into additional markets, it must establish new warehouses in each new region. Domino’s and McDonald’s literally have warehouses in every three to four towns, allowing them to service local retail locations quickly. Domino’s and McDonald’s have greater expenditures since they handle frozen foods (burgers or fries), which need cold rooms and cold chains to transport.
- NOTE: Warehousing costs vary from transportation and delivery costs, which are computed separately.
- Based on these assumptions, the study shows:
- Standard LCL would reduce transport costs but would result in much higher inventory costs owing to extended and extremely variable transit durations.
- Using full containerload (FCL) rather than LCL decreases inventory-related expenses, but it also increases transport-related costs owing to wasted space in 20-foot containers held by only 2,500 metric tons of freight.
- Switching to air freight to save inventory costs would incur the greatest transportation costs, resulting in the highest overall total distribution costs.
- Day-definite LCL might reduce overall distribution costs (the sum of transportation and inventory-related expenses). Compared to LCL, the shipper would pay roughly $600,000 more on transportation to employ day-definite LCL service ($1.8 million vs. $1.2 million per year), but would save around $825,000 in inventory-related costs ($1.3 million vs. $2.2 million per year).