Productivity Measurements That Can Help Manage Physical Distribution Costs (1992)

ABSTRACT This paper presents some transportation cost and utilization ratios developed by the author. Physical distribution costs affect almost every company, and the productivity ratios illustrated here can be employed in many environments. These costs have largely been ignored while most efforts at cost reduction have focused on inventory ordering and storage techniques. Today, rising distribution costs means that managing such costs may provide a greater competitive edge than reducing other costs. This paper also shows how a little imagination can be used toward developing similar measurements for other operations. INTRODUCTION Every company is impacted by distribution cost. Whether a company purchases raw materials or wholesale products, it receives goods by shipment. Companies that provide products must ship goods to customers. Transportation is an essential item that adds seemingly little value to the product. Yet it is costly, and management of physical distribution costs could mean the difference between survival and failure in today's competitive market. This paper examines some transportation cost and utilization ratios that may help lower distribution costs. These ratios should also be useful to companies in the rapidly growing transportation industry. Other physical operations might be improved as well by examining these measurements. As seen here, developing similar measurements for any function often requires more imagination than technical knowledge of the operation. Technological advances have improved the handling of inventory, especially in regard to warehousing and storage. Just in Time (JIT) and similar inventory techniques have reduced the cost of inventory storage. Still, inventory must be shipped to manufacturing and merchandising destinations. In fact, the dollar cost of shipping raw materials is often greater under warehousing reduction techniques. Shipments must be on time and in sufficient quantities for firms using JIT, computer integrated manufacturing, or other world class manufacturing techniques. Larger shipment size typically results in a premium cost per shipment. Whatever inventory technique you employ, you should manage transportation costs. First it is necessary to consider some overall physical distribution productivity measurements. Next, productivity measurements are divided into indivdual components of physical distribution: equipment, labor, and overhead. This segregated analysis is essential for improving productivity in transportation. Distribution productivity may be divided into other components than those listed above. Costs may be broken down into additional components such as fuel, packaging, loading, and similar costs. Also, some companies maintain a transportation fleet while others depend upon independent carriers. We try in this paper to show productivity measurements useful for varied applications with our main focus on firms that do much of their own transporting themselves. Measurements discussed here should also prove useful to accountants employed by these firms or to practicing accountants with similar clients. OVERALL PRODUCnVTTY MEASUREMENTS Whether your firm does its own transporting or hires independent carriers, you can apply several useful overall productivity measurements. You can use these measurements to compare several years of company operation or compare your company with others when industry data are available. Overall measurements seldom pinpoint any specific problems, but rather provide a bottom line indication whether overall productivity and costs incurred are reasonable. If you are using JIT, you can compare physical distribution costs before and after adopting the inventory rninimizing plan. Such a comparison may indicate if the trade-off of less inventory versus the change in shipping is worthwhile. The following goals are appropriate to set in examining overall performance in physical distribution: 1. …