Total Distribution Cost

Definition:-
Cost or expenses incurred in moving goods from the point
of production to the point of consumption. Also called
distribution expenses.

A distribution cost is a cost that is incurred to warehouse,
transport, or deliver a product or service.
It is also known as distribution expenses.

. Distribution costs must be planned for in relationship to
product/service volume, and these costs must be controlled
for profitability to result from sales.

Inventory Carrying cost
Cost to hold and store its inventory.
Vital part of management information to
Optimize the logistics system of a business.
Logistic system include inventory carrying costs,
transportation costs, warehouse costs,
Order-processing costs, and lot quantity costs.

Determinants of inventory carrying costs are:
Product portfolio/Capital
Order frequency
The number of warehouse locations at which
stock is held
Costs attached to order processing activities
Management costs
The maintenance of information systems and
communication between sites
Inventory shrinkage

There are two methods of handling inventory, either
byOrdering in Lots or by Carrying None/Very Little
Stock
Holding costs

Ordering costs

Storage costs
Rent/depreciation
Labor
Overheads (e.g. heating, lighting,
security)
Money tied up (loss of interest,
opportunity cost)
Obsolescence costs (if left with stock
at end of product life)
Stock deterioration (lose money if
product deteriorates whilst held)
Insurance and taxes on inventory

Clerical/labor costs of processing
orders
Inspection and return of poor quality
products
Transport costs
Handling costs

Packaging Cost
Packaging cost is a significant factor in costing of product.
Packaging plays an important role in an manufacturing
industry.

It provides protection to products & maintains product identity
when products arrive at the market place.

Different packaging materials are used in manufacturing
industry for various products such as Glass, Wrappers,
laminates, carton boxes, polythene, theromocol, bottles, cans,
bags, papers etc.

Packaging is an integral part of the materials supply chain. It
protects goods from damage, allows efficient distribution,
informs the consumer and helps to promote goods in a
competitive market place
Transportation Cost
Transportation cost is about distribution of goods and
services from several supply locations to several demand
locations.

It is the means of moving goods from production unit to
customer. It is the most important cost area in physical
distribution

The objective in the transportation cost is to minimize total
distribution costs (to meet the demand with the minimum
cost).

In general modes of transportation cost can be rated on the
basis of speed, reliability, completeness, and cost per ton mile

Plan on Transportation Cost
To find a distribution plan, set up a
transportation matrix.

A Transportation matrix consists of;

supply and demand centers,
the distribution costs per unit from each
supply center to each demand center,
the demand of demand centers,
the capacity of supply centers.
Total demand and total supply might be equal
to each other or total supply might be
greater or less than total demand.

Distribution Channels
Distribution channels are classified as:
1. Direct Marketing
2. Channel Marketing

Direct Marketing occurs when
the Producer connects with the end
User.
e.g. Tupperware, Lands End,
Mary Kay Cosmetics

Channel Marketing many producers sells products and services to end user
through Marketing channels.

Each channel member :
1. Provides Value
2. Performs a function
3. Expects an economic return.
Impact of Distribution
Affects sales
Distribution affects profits and
competetiveness
Delivery is seen as part of the product
influencing customer satisfaction

Distribution Cost Analysis
Cost Benefit Anaysis
Classic Form of Review
Captures all benefits associated with the distribution sytem
Activity Based Costing
In-depth review of cost
Cost associated with each activity
Resource Consumption Method
Defines each resource consumed in a business process

When to review distribution cost
A company experiences growth, has a change in its customer or
product mix or decides to expand geographically

Merger or acquisition activity , or haphazard growth causes distribution
facilities to overlap

High Growth strains the current distribution network , or renders it
inadequate

Transportation planning is not managed strategically across all facilities
Inefficiency exists within order management warehouse, or
transportation processes

Inventory levels are excessive for certain items and stock-outs are
frequent for others
Key ways to reduce distribution cost



1. Eliminate unproductive labour
2. Reduce unproductive Indirect labour
3. Reduce material usage and waste
4. Improve equipment performance
5. Improve space utilisation through
consolidation
The Advantages of Total Distribution Costing System :
Making possible equitable and Scientific Pricing by reducing prices of
products that use less activity resources and increase prices of
products that
consume more of the firms activity resources.

Provide value added services or top-ups to existing products on
actual cost

Eliminating unprofitable items from the product line, thereby increasing
profitability without increasing prices, a valuable option in recessionary
times.

Exposing waste and inefficiency that contributes to boosting
productivity.

Identifying and eliminating non-value adding activities, or activities that
do not contribute to the final value of the product or process.

Providing quantifiable figures for planning and estimates.

The major Disadvantage of Total Distribution costing


Although activity based costing is a scientific approach, the method of
implementation is complex, time consuming, and costly.


A) Complexity


B) Resources


C) Duplication


D) Short-Term Focus

Limitations :


Implementing an ABC system is a major project that requires substantial
resources.

Once implemented , costly to maintain.

Data concerning numerous activity measures must be collected , checked, and
entered into the system.

ABC data can be easily misinterpreted and must be used with care when used in
making decisions.

Costs assigned to products, customers and other cost objects are only potentially
relevant.

Before making any significant decision using activity based costing data, managers
must identify which costs are really relevant for the decisions at hand.

Wind Power Energy Suzlon India
( Non Conventional energy system )
Total Investment Cost , Including Turbine , Foundation
, Grid connection , Other Cost etc shown for Different
Turbine size and Countries of Installation $/kW
0
200
400
600
800
1000
1200
1400
1600
Spain Denmark Germany UK Taiwan
Installation Countries
$
/
k
W
Turbine Cost
Other Cost
Energy Cost
Cost Of Production Cost Of Distribution

Investment Cost Transmission Cost
Turbine Cost Investment Cost
Operation and Maintenance
Cost Distribution Cost
Auxiliary Cost of Foundation Operation and Maintenance Cost
Grid Connection Cost Administration Cost
Service Cost