6 Distribution Costs, Control and Customer Service

8/18/2019 6 Distribution Costs, Control and Customer Service

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Distribution Costs,

Control

and Customer

Service


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IntroductionSelling and distribution costs, no doubt, broadly represent marketing cost. Selling

costs seek to create and stimulate demand, secure orders and retain customers.

Distribution costs cover the sequence of operations from where the packed

product is made available for dispatch ending with marketing the reconditioned

returned empty package available for reuse. These could be subdivided into the

following:

1. Transportation such as freight and insurance, operating expenses,

depreciation of delivery vehicles, etc.

2. Warehousing and storage rent, insurance and depreciation of warehouses,loss in warehouse, stock record – keeping costs, etc.

3. Administrative costs such as cost of carrying and buying of supplies,

administration overheads apportioned to distribution costs.


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Need for a Proper Analysis of Distribution CostsThe necessity for a proper classification and analysis of distribution costs

arises due to the following reasons

To determine cost of sales of different jobs and products, and the extent of

profitability of each of them.

To help in fixation of optimum sales level.

To control costs of efforts in different areas of distribution activities, to

determine the profitability of various sales outlets under different conditions

in different markets and by different methods.

To help in guiding marketing policy both in the short and in the long-term.


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Cont….

Allocation of Distribution Costs

Allocation of Selling and Distribution Costs to Products

Functional Cost Group Bases of Allocation

1. Inventory investment charge such as

insurance and taxes

Average inventory value

2. Storage of finished goods handling Floor space occupied

3. Inventory record-keeping Number of invoices made/requisitions/orders

handled

4. Finished goods handling Number of standard units handled

5. acking and shipping Number of standard shipping units! time studies

. "ransportation #eight! number of standard shipping units

!. Sales promotion programmes $irect %here possible! analysis of promotion

". Sales solicitation "ime studies& analysis of sales efforts


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Cont….

#. 'rder entry ( processing of orders and

preparing invoices

Numbers of invoices& number of orders

1$. )illing ( time spent in processing orders and

preparing orders

Number of invoices& number of orders

11. *redit extension ( costs related to numbers

of handled customers! orders processed!

posting! invoices

Not allocated to products

12. Accounts receivable record-keeping+ Not allocated to products+


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Allocation of Selling and Distribution Costs to Custo%ers

Functional Cost Group Bases of Allocation

,+ Inventory investment charges enerally not allocated to customers

.+ Storage of finished goods enerally not allocated to customers

+ Inventory record-keeping enerally not allocated to customers

0+ Finished goods handling Number of invoices& number of orders& standard unitshandled

1+ acking and shipping Number of standard shipping units

2+ "ransportation referably direct& %eight handled

3+ Sales promotion Analysis of promotion programmes

4+ Sales solicitation "ime studies& number of sales calls& analysis of salesefforts

5+ 'rder entry Number of invoices& number of orders

,6+ )illing Number of invoices& number of orders

,,+ *redit extension Average amount outstanding& number of orders

,.+ Accounts receivable record-keeping+ Number of posting& number of invoice+

Source: Crowningshied Gerald R and Gorman, Kenneth A. Cost Accounting: Principles and

Managerial Applications (Boston: Houghton Mifflin Company, 1974), R 486.


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Analysis of Distribution Costs

The analysis of distribution costs can be discussed on the following lines:

Product or products lines

Individual customers or groups of customers

Channels of distribution

Salesmen

Geographical area or territories

Terms of sales

Order sizes.


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Elements of Total Cost in Physical Distribution System Transportation costs Railway Cost

Freight Rate Structure in Road Transport

Cost of Airways

Costing of Seaways

Inventory Costs

Ordering Cost

Cost of Materials

Carrying Cost

Warehouse Costs

Material Costs

Packaging Costs

Customer Service Costs


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Cont….

Control System for Efficiency

Logistics system should function efficiently. Efficiency is the ratio of output

to input. A logistics system requires the following efficiencies:

Operating efficiency

Financial efficiency

Service level efficiency

Marketing efficiency

Personnel efficiency

Organisational efficiency.


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Inputs

7uman 8esources

Financial 8esources

Information

8esources

Process

9anagement Actions

lanning! :xecution&

*ontrol

;endors

8a% materials! In

rocess< Final oods

=ogistics Activities

Inventory! 'rder

processing! #are-housing!

"ransporting!

ackaging!

*ommunication!

8eturns& "racking

Outputs

*onsumer

"ime >tility

lace >tility

:fficient

9ovement

*ompetitive:dge

*onsumer

Satisfaction

&utput of 'ogistic S(ste%


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Cont….

Productivity Aspects and Logistics Management

The following ratios are suggested by the Asian Productivity Organisation

(APO) for physical and financial productivity measures

No. of deliveries on time/year1. Right Delivery Ratio =

Total no. of deliveries/year

Tonne kilometre run/route2. Route Potential Ratio =Tonne kilometre capacity/route

No. of accidents/year3. Accidents Ratio =

No. of trips operated/year

No. of consignments booked/year4. Service Ratio =

No. of consignments planned/year

Vehicle kilometre actually run/day5. Vehicle Utilisation Ratio =

Vehicle kilometre planned/day


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No. of consignments damaged in transit6. Breakages Ratio =Total no. of consignments

Tonne kilometre achieved/year7. Business Efficiency Ratio =

Tonne kilometre planned/day

Total operating expenses8. Operating Express Ratio =

Total earnings

Net profit9. Net Profit Ratio =

Total earnings

No. of prompt deliveries/year10. Promptness Ratio =

Total no. of deliveries/year


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Cont….

Distribution and Customer Satisfaction

In customer services, there are three elements, which are important for themarketer, in decision making.

)le%ents of Custo%er Ser*ice

P+),-+ASAC-/&A')')0)-S

-+ASAC-/&A')')0)-S

P&S-,-+ASAC-/&A')')0)-S

( Statement of policy'rganisation

( #orking 8elations Installation! %arranty

( Staff "raining in handlingcustomers

8epairs!

( System $evelopment Spare parts! customer claimsand complaints

( "echnical services


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Hopkins and Bailey have very precisely described the functions involved in

service after sales. These functions are:

Information service to customer

Warranty administration

Maintenance repair

Preventive inspection

In-warranty repair

Out-of-warranty repair

Repair service centres

Maintenance contract

Documents

6 Distribution Costs, Control and Customer Service