Category: Plant / Production

Defining Distribution Costs

Discussing physical distribution in the beverage arena can be complex and endless; however, finished product distribution is the final step in the supply chain, is under daily vigilance and incurs ‘non-value added’ cost to the product that is a constant concern to producers and distributors.  Countless observations and analysis of distribution operations concluded that variable distribution definitions exist leading to inaccurate cost evaluations/comparisons.  Where does the operation begin and where does it end and what is an acceptable distribution cost per case under variable conditions?  The purposes here 1) relate variations in physical distribution activity at selected beverage segments, 2) show how responsibility variations affect cost and 3) clarify the realistic scope of ‘distribution’.

Defining where distribution operations begin requires defining the preceding pre-distribution operation at warehouse or distribution centers.  Separating the operations is necessary because combining the two distorts true distribution cost. And, pre-distribution differs from warehousing because it involves 1) moving cases from storage, manually, semi-automated or fully automated, 2) case picking, pallet make-up and order staging and 3) loading route vehicles. Loaded vehicles ready for dispatching to various routes creates the actual physical distribution starting point. The distribution methods vary and will affect delivery and order completion at retail or commissary locations where the distribution operation ends.    

With distribution clearly defined, a good basis is created to analyze responsibilities, calculate costs and establish controls.  Some beverage segment overviews illustrate the point. 

Soft drinks, franchises, producers/distributors: In this segment, producers/distributors usually have fleets and have distribution responsibility to retail.  Franchisees can calculate delivery costs according to distribution methods  (conventional, pre-sell, tell sell, bulk) and execute operational controls.

Beer, Brewery Producers, Wholesale Distributors: Most breweries produce product and do not operate distributorships.  Although breweries may ship product to wholesalers via staging areas or third party operators, the wholesalers absorb the shipping cost from the brewery. In addition, wholesalers usually deliver to retail via their own fleet and incur local distribution costs. In this scenario, wholesalers can exercise control options from the brewery and to retail.

Wine and Spirits, Vintners and Distillers, Distributors: Other than on site stores at vintners or distillers, under control by state laws, most wine and spirit producers ship product to distributors.  Distributors in most instances incur the hauling costs and may utilize owned or leased carriers with the possibility of product pricing negotiated with the hauling costs. In many situations laws do govern pricing and distribution costs cannot be negotiated; therefore, distributors have limited options for controlling and affecting the costs.

Beverage variable distribution costs are a critical issue, require operational knowledge and should be a top managerial priority.  

 

John Peter Koss, a beverage operations advisor, is a licensed registered professional engineer and has 50-plus years of beverage business experience. He can be reached at oleboss@aol.com.

 
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