Gunther Sanchez is currently doing his diploma-thesis in the Industry Business Unit Consumer Products at the SAP AG aiming to graduate as a industrial engineer.
Costing Methods in today distribution-logistics for consumer product companies
While supply chain operations have been subject for optimization efforts since the past few years, distribution logistics lately moved into the sphere of action. Those formerly secondary activities ensuring product availability today turned into important factors for differentiation efforts. On this account it’s even more important for companies gaining performance optimization by either make or buy activities, streamline distribution-structures or resources in-use. But in the first step they need to know their cost structures as well as their behaviour on potential decisions. In this context frequently asked questions are:
- What are the costs-to-serve a certain customer?
- How profitable are my products, customers or channels?
- Are processes running efficient and effective?
- Which delivery routes are unprofitable?
But before looking on possible ways and instruments to answer these questions, one must understand the influences of current market trends on distribution-logistics. This step is so important because today’s market situation and developments are giving the framework for distribution activities, while those in turn represent the objects on measuring efforts.
Distribution-Logistics in the consumer product industry
A number of environmental developments during the last decade transformed markets from a seller- to a customer-oriented point of view. This is when today’s principle of demand determines supply entered the stage and companies started to fight for every customers. In the meantime mature markets lead to strategies of mass customisation, sku proliferation and cut-throat competition forcing companies to search for new advantageous ways of distributing products to customers. The latest tier of this evolution is the approach aiming a Demand Driven Supply Network (DDSN) for maximum customer-orientation and gaining competitive edge by building more efficient supply chains. To stay flexible with fluctuations in demand companies have to deliver in shorter time cycles and at the same time reduce their own inventories, to keep cost of working capital low. But larger assortments, low locally stock-keepings and frequent delivery-cycles not only influence material-flow related distribution activities. Higher efforts on adjustment, by handling more orders and keeping inter-company-activities running, are coming along with that, too. Furthermore, rising market power of retailer companies puts pressure on manufacturers while they are trying to establish their own brands, force price cuts and negotiate specific delivery terms.
As a result of all these influences most popular structural trends of today’s distribution-networks are centralization, internationalization and cooperation. While theses trends are trying to deal with already mentioned influences, they are adding complexity to distribution-logistical planning and execution processes. As one can easily see – the picture of distribution, as the structure of its costs, changed heavily and turns distribution logistics to be the next big upcoming object of process optimization efforts.
Costing distribution processes
All of these developments have one thing in common – they force companies to reconsider their existing distribution-processes and structures.
Against this background the most important objective for manufacturers is gaining better insights on process performances and cost structures, in order to learn which customers, delivery routes and activities are profitable and which are not. Detailed fact-based knowledge of distribution-structures and delivery-routes throughout the distribution-network can be used to identify improvement areas or benchmark approaches. Furthermore detailed cost information enables companies to get better contract negotiations, by knowing their true costs to serve.
But how can companies gain this information? – While distribution, in most companies, is a trans-sectoral, only indirect value adding business function, traditional controlling approaches have difficulties to collect managerial information. Making accounting efforts even more challenging, activities in distribution can be quite complex, as there are different way of serving one customer and performances can often not clearly be assigned to only one calculation object (e.g. mixed pallets).
As one can easily see, transparencies about distribution activity performance aren’t that easy to gain. While there are some hurdles to tackle, companies should start with a clear definition of distribution related activities and their cut-off from other business areas like sales or manufacturing for example. After the first steps are done the question for an adequate costing model to evaluate activities will soon arise.
Process-oriented costing models enter the stage
While traditional costing systems are production-oriented and do not stay abreast of trans-sectoral process executions and the overhead-dominant business sectors, process-oriented costing models entered the stage. The most popular ones are the US-American Activity-Based-Costing (ABC) from Kaplan and Cooper and the German Prozesskostenrechnung (PKR – there is no translation for this approach) from Horváth and Meyer. Both concepts are following similar intensions by leaving a strictly sectoral perspective on company costs and scaling overhead by using adequate cost-drivers.
Beside both concepts there are some later ones, just like the Time-Driven ABC (TD ABC) from Kaplan and Anderson, and extensions of the PKR by elements of the Grenzplankostenrechnung (GPKR). All of these concepts provide useful inspirations for mapping distributional process’s cost structures.
Nevertheless a few things have to be considered by facing the costing approach. The most important one is to balance accuracy and effort of a possible solution. While distributions processes can be quite complex, referring to the variance of consumer-individual picking, packing and transportation, or the number of serving customers throughout the distributions-network, accounting execution should follow the principle of better knowing the caused costs “approximately right – than exactly wrong”.