FORT LAUDERDALE, Fla. -- The industry's almost myopic focus on gross margin, "perhaps the biggest driver of behavior," fosters some of the most unprofitable distribution practices.
Rather than concentrate on gross margin only, companies need to better understand the net cost for a particular product to land at the store shelf, said Jim Blaser, partner in the Consulting SysteCon division of Coopers & Lybrand, Cleveland.
Blaser outlined the concepts of an activity-based costing accounting system during a presentation at the 1995 Distribution Conference here sponsored by the Food Marketing Institute, Washington.
Activity-based costing, he said, is an analytical tool that can help companies identify the true cost of delivering goods by looking beyond the gross margin to view direct and indirect expenses in a cross-functional way.
Although companies have had success increasing their gross margin, "How come we still make 1% to 2% [profit] at the bottom line? Because we don't understand a lot of the selling and general merchandising distribution costs that you folks manage," he said to the group of distribution and transportation executives.
With activity-based costing information, companies can better understand the costs of those specific activities, allocate resources more appropriately and refine their strategy for richer profit.
"The real key to ABC is to be willing to adjust your strategies and change your measurements once ABC is in place," Blaser noted. He then detailed how one wholesaler obtained valuable strategic guidelines from an ABC project, but resisted making any changes to improve business practices.
The ABC project identified a $200,000 savings opportunity in
warehouse labor if 1,000 items were picked on a full-case basis, rather than split-case picking.
Such a change would require some adjustments at the store level to accommodate additional inventory, but "The stores wouldn't spend the labor to reset the shelves, and the category managers wouldn't redo the planograms -- even though there was a five-to-one payoff," Blaser said.
"So, unless you're prepared to actually do something [with ABC-generated data], don't go through the aggravation of developing an activity-based costing program." Used effectively, activity-based costing information can shed new light on the best distribution method for a particular product category.
"Every single product and product category has a best way to go to market," he said. "There's a whole variety of characteristics that drive the profitability of that product, [for example] its cube, its weight, its value relationship to its size, its lead time, its vendor reliability, the 'value added' [steps necessary] as it goes through the warehouse and whether the product can be picked in a case, a pallet, a layer."
Activity-based costing uses such criteria to determine cost more accurately and that knowledge can be applied to allocate labor and capital in a more profitable manner.
The costs associated with handling dry grocery items, for example, vary greatly from costs tied to the handling of frozen food and ice cream. Distribution of general merchandise, with its high profit margin and slow turn rate, is affected by a whole different set of costs.
"And now we're beginning to wake up and say, 'This [product category] is a different business.' " ABC also allows companies to compare the cost-effectiveness of different distribution approaches for similar products.
A private-label item may deliver a more generous gross margin than a national-branded direct-store delivery item, he said. "But you folks who run distribution know that's not the whole story. If we really had full, net costs for both products we might draw a different conclusion about their profitability.
"In the case of the DSD-[delivered product] we don't have to take it to our distribution center, we don't have [to maintain] inventory and we don't have store delivery [costs]," he said.
"The bottom line is on the net profit basis," he said, and when all those costs are considered, private-label and national-branded DSD merchandise can deliver similar net profit in terms of dollars even though their gross margins are dramatically different.