Pricing distribution costs
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Pricing Distribution Costs. System Generated Revenue (66%) Other Sources of Revenue (34%). System Generated (66%). Markups (68% of the 66%) Must cover costs and contribute to profit Activity Based Costing (ABC). Activity Based Costing. Alternative way to allocate overhead

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Pricing Distribution Costs

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Pricing distribution costs

Pricing Distribution Costs

  • System Generated Revenue (66%)

  • Other Sources of Revenue (34%)

HED 460


System generated 66

System Generated (66%)

  • Markups (68% of the 66%)

    • Must cover costs and contribute to profit

    • Activity Based Costing (ABC)

HED 460


Activity based costing

Activity Based Costing

  • Alternative way to allocate overhead

    • Formerly labor costs were highest costs

    • Now, materials costs are highest

  • Tries to turn indirect costs into direct costs

HED 460


Activity based costing1

Activity Based Costing

  • Attaches costs to products and services based on activities performed to produce, distribute, support those products/services

HED 460


Activity based costing2

Activity Based Costing

  • Activities

    • Acquisition

    • Handling

    • Storage

    • Delivery

  • More complex than cost accounting but benefits are worth it

HED 460


System generated 661

System Generated (66%)

  • Cash discounts (27%)

    • Reduction to price for early payment

  • Backhaul revenue (5%)

    • Avoids truck returning empty after delivery

    • Pick up merchandise at a manufacturer on the way back to DC

HED 460


Other sources 34

Other Sources (34%)

  • Inside Margin (revenue generated by some activity other than distributing products

    • Forward buying (44% of the 34%)

      • Buy more than needed at discount price

    • Diverting (9%)

      • Buy product on “deal” in one region and resell at profit in another

HED 460


Other sources 341

Other Sources (34%)

  • Inside Margin

    • Promo money (35%)

      • Offered by manufacturer - not passed to retailer

    • Slotting allowances (12%)

      • Payment for space on retail shelves

    • Salvage (<1%)

HED 460


System generated 662

System Generated (66%)

  • Markups (68%)

  • Cash Discounts (27%)

  • Backhaul Revenue (5%)

HED 460


Other sources 342

Other Sources (34%)

  • Inside Margin

    • Forward Buying (44%)

    • Promo money (35%)

    • Slotting allowances (12%)

    • Diverting (9%)

    • Salvage (<1%)

HED 460


Cross docking ecr initiative

Cross Docking (ECR initiative)

  • Sending goods directly to the retailer by bypassing storage

  • Benefits

    • Reduces distribution costs

      • Storing, picking

    • Improves efficiency

      • >inventory turn, < carrying costs, faster flow to customers

HED 460


Cross docking products

Cross Docking Products

  • Short replenishment lead times

  • Strong demand

  • Predictable volume

  • Cases on pallets

HED 460


Cross docking requirements

Cross Docking Requirements

  • Partner with supply chain members

  • Confidence in product quality and availability

  • Technology

  • Personnel, equipment, facilities

HED 460


Cross docking asn s

Cross Docking - ASN’s

  • Electronic bill of lading (invoice)

  • Eliminates retailers opening cartons and inventorying

  • 85-95% department store merchandise comes with ASN

  • Helps plan staff to help with unpacking

HED 460


Cross docking

Cross Docking

  • 15-30% products are now cross-docked

  • Save 5-20% in handling costs

  • U.S. is behind Europe

  • Tesco and Sainsbury even cross dock fresh foods

HED 460


In class 5

In Class #5

  • View video tape

    • Discuss terms from reading or video that are still confusing

    • What are three key “learnings” from the video?

    • Group members’ names

HED 460


Direct store delivery

Direct Store Delivery

  • Back door traffic at store

  • 25% of grocery products never see a warehouse

HED 460


Dsd product characteristics

DSD Product Characteristics

  • Shelf life

    • Bread/pastry/salty snacks/beer

    • 30-70 days DSD vs 390 days for warehoused category

  • Higher SKU velocity

    • 12 units/store/week vs 9 units

HED 460


Dsd product characteristics1

DSD Product Characteristics

  • Demand variability

    • Frequent promotions

    • Frequent service

  • Lower value density

    • Fragility - chips

    • Weight – beer, soft drinks

HED 460


Dsd product characteristics2

DSD Product Characteristics

  • Lower value density (cont.)

    • $27/cu. Ft. (dsd) vs $100/cu. Ft.

    • Price divided by space

    • High cost as a % sales

  • Merchandising difficulty

    • Special equipment

HED 460


Problem

Problem

  • How can you have a low GM but high profit and sales?

    • COGS must be high

    • Expenses must be minimized

    • Emphasis on contribution margin

HED 460


Direct store delivery results

Direct Store Delivery Results

  • More cash flow

    • 8 days of inventory held with 30 day payment

  • Turns

  • Contribution Dollars

  • GMROI

  • High % of in-stock

HED 460


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