HED 460

Pricing Distribution Costs

System Generated Revenue (66%)

Other Sources of Revenue (34%)

HED 460

System Generated (66%)

Markups (68% of the 66%) Must cover costs and contribute to profit

Activity Based Costing (ABC)

HED 460

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 Costing

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

HED 460

Activity Based Costing Activities

Acquisition Handling Storage Delivery

More complex than cost accounting but benefits are worth it

HED 460

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%) 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 (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 (66%)

Markups (68%) Cash Discounts (27%) Backhaul Revenue (5%)

HED 460

Other Sources (34%)

Inside Margin Forward Buying (44%) Promo money (35%) Slotting allowances (12%) Diverting (9%) Salvage (<1%)

HED 460

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

Short replenishment lead times

Strong demand Predictable volume Cases on pallets

HED 460

Cross Docking Requirements

Partner with supply chain members

Confidence in product quality and availability

Technology Personnel, equipment, facilities

HED 460

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 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

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

Back door traffic at store 25% of grocery products never see a warehouse

HED 460

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 Characteristics

Demand variability Frequent promotions Frequent service

Lower value density Fragility - chips Weight – beer, soft drinks

HED 460

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

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

More cash flow 8 days of inventory held with 30 day payment

Turns Contribution Dollars GMROI High % of in-stock