Calculating pre-distribution versus warehousing costs
Established function/activity cost relationships aid supply chain
In many industries, the term warehouse is used to describe various physical structures that perform numerous functions and activities. Studies and evaluations of supply chains throughout the beverage arena reveal this also is true for the beverage market.
Even though warehouse structures might be called sales centers, distribution centers, dispatch stations and other names, the specific terminology becomes very important. This is because two main factors are involved and should be accurately defined: what functions are preformed and what is the cost of execution? Most supply chain managers usually create a broad activities outline to track large segments for control and cost containment. However, within those variable activities, there appears to be questions about function and cost. In other words, what are the activities in the function and what does it cost? Realistically, focus on this factor can be a key to successful operations.
From an operations perspective, several scenarios should be considered: producer/shipper, producer/distributor and distributor. In the beverage supply chain, operators should be able to define and control not only the function and activities specific to that function, but also the costs involved in the performance of those activities.
In all three scenarios, a clear distinction should be made between warehousing and what is being referred to as pre-distribution to accurately establish the function/activity (F/A) cost relationship. Practically, every F/A segment of the supply chain should be clearly defined and understood to obtain the proper identities of functions.
The most direct way to emphasize the point is to state what prompted the focus on the subject of pre-distribution. Operators should ask about the cost to warehouse a case of beverages? Answers received were variable, raised more questions, doubted cost figures and created several debates.
To emphasize the intended focus, a dissection of the beverage supply chain cycle by function should be conducted.
Product – regardless of product type, preparation function activities are the true starting point involving labor, material and equipment costs.
Packaging (production) – the prepared product is conveyed into packaging function activities also involving labor, material and equipment costs. Realistically, the end of the packaging function is the termination of production costs; however, this could vary depending on the cost system. After the supply chain packaging function, most beverage producers can and do with reasonable accuracy identify and record a production cost for each case based on previously defined activities.
In scenario 1, the producer ships finished products directly to distributing facilities. A storing function might be involved at a different location. However, when scenario 2 is completed with packaged production received from an adjacent producing line, a storing function normally is created as the next step as now described.
Finished production – saleable cases by FLT, AGV or other handling system are transported to storage in a warehouse. Pallet loads of product stacked or racked constitutes the beginning of warehousing per se. This is a crucial point in the supply chain because saleable cases are being stored until another functions’ activities start. This is where, instead of just storing, saleable cases being retrieved become part of the pre-distribution function with its various activities and related costs.
Creation of a pre-distribution function (or cost center in any accounting system) is not new. The function has been studied, evaluated and constantly performed as a major segment (manually and automated) in the supply chain. It has always existed, but in most cases not recognizable as an important cost incurring function. An accurate distinction is needed.
Historically, placing beverage cases in storage, stacking or racking, removing beverage cases from storage, picking and staging orders, making up partial pallet loads and loading vehicles for delivery are cost-incurring activities that have been classified or charged as warehousing. The point might be debatable; however, specific activities that incur labor and equipment costs should be identifiable, properly charged and controllable. These are preparing for distribution.
Unfortunately, following the “everything in the warehouse is warehousing” practice does not present an accurate picture of the warehouse cost for each case for the activities defined as warehousing, which by definition, usually includes rework, disposition, relocating inventories and damage reclamation.
Studies reveal these activities can possess dual classification but, the important activities in pre-distribution are constantly impacted by the SKU explosion, automated storage and paperless transactions.
Warehousing and physical location of stored beverage cases filters into the cost of carrying an inventory at acceptable quantity and cost levels.
By recognizing pre-distribution as an important and major cost-incurring function, producers and distributors will enhance the final supply chain step — distribution to the consumer. What are your pre-distribution costs compared with warehouse costs? BI