Monthly Archives: September 2013

About cost……

…. in transport and distribution. In this post I want to discuss about the cost in transport and distribution. It is the most important thing to control this cost, otherwise you can loose a lot of money.
The basic parameter that you must calculate is 
cost per km (mile) or cost per hour (for some machinery or vehicle). I am from Europe and i refer to cost per km because we use km here, but all this principle can be easy transfer  to cost per mile.

When you calculate the cost per km you must can take in consideration as many parameter as you have at the time because when you use more parameter the value become more accurate. I made a web application ( who may help you to calculate cost per km (unfortunately it is in Romanian language, but i hope to have time to translate it, in the meantime you may use Google translate) and this application take in consideration more than 20 parameters. Also here the rule 20-80 may be apply because only 3 parameter influence 70% of the cost, and this parameter is: fuel cost, drivers salary and maintenance. In this order, fuel may influence between 35 to 65% of the cost per km (depends on the car type and also of the transport activities that you have), driver salary may influence between 20 to 35 % (can be more in certain country and less  in other country) and maintenance between 8 to 17% (can be more or less depends on the conditions).

In my consultancy project i have case where fuel cost is 25% of this cost, but that car is used in small area distribution.

Cost per km is a (let’s say) technical value and it cannot be correlate easy with the other business parameter. In most of the case the management want to transfer this value into other value which can be connected with the products and profitability. They want to have a cost per products or cost per kg (ton) etc.

Cost per kg or cost per ton is easy to calculate if you have cost per km. For example: if you cost per km is 0.4 euro and the car made 400 km with 2,5 ton result a cost per ton: (0.4X400)/2.5 = 65 euro/ton. It is easy, but you must take care because in most of the time the number of km must be the total km of the route.

In some cases cost per ton is not relevant for the business. Cost per ton it is use for products who is sell in ton or kilo (food for example), but if you have computers or television the cost per ton is not relevant, but it is relevant cost per products or per pallet, box etc.

Cost per product it is more complicate to calculate than cost per kg in case of distribution, if you have only one products in the car the calculation is simple, also if you have 2 products the calculation can be simple (if you have products with similar dimension) because you can assimilate percentage of the cost related with the percentage that each products represent from total number of the products. Even if you have 2 products, but with different dimension (for example laptop with washing machine) the calculation become more difficult. Laptop it is small and easy, with similar value like washing machine witch is heavy and larger than laptop and it is very difficult to have some clear criteria how you associate the percentage with the products.

This calculation become more complicate if you have 20 products with different dimension and weight. In this case is easy to calculate an average and consider this value for further calculation.

If you distribute your products to clients the same product do not have the same cost for different client because each client is in other geographical location. In this case it is necessary to calculate cost/product/client or cost/ton/client witch become more complicate to calculate. I will made an example of this calculation in the future posts.

Also it is possible to use average in this case, but in this case (when you use average) you consider that all the client from a route have the same costs and all it is profitable witch is not real all the time: for example a client witch is close by the distribution center will have a smaller cost that a client witch is far from distribution center (close or far means the distance considering the way that you made the route, not the geographical distance). In most of the case the client witch s far from distribution center order small value and in this case that client it is very possible to be unprofitable. If you use average you cannot see unprofitable client and this unprofitable client “eat” profit from profitable client. For my point of view it is very important to identify the unprofitable clients and find war to made them profitable (in most of the case this will involve the sales department). We will discuss in the future posts about the way to made clients profitable.

Days of stock

When we discuss of stock we can have multiple approach: we can discuss about quantity of goods (how many products we have on stock), we can discuss about value (what is the value of the products that we keep on stock), but more often we discuss about day of stock.
Days of stock mean if i sell all the products that i have it in the stock in how many days all the stock is finish. This therms is relative to sales. But why we use this instead of quantity or value of the stock?
One of the reason is that this parameter days of stock it is constant for all the period of the year, and it is not affected by the sales fluctuation, it remains constant even if sales fluctuated in different period of the year or in different period of the month. For example 3 days of stock for product X is 3 days of stock in August(worst month in the year) and 3 days of stock in December (best month in the year). What is the difference between those 2 months? Even if i have 3 days of stock in August and in December the quantity will not be the same and we adjust the quantity of products X in those different months related to the sales. How we correlate this? It is a simple relation days of stock = (total quantity of product x) / (ADS) where ADS means average daily sales and means how many product X do we sale average per day. So, days of stock is constant but we adjust the quantities related to the daily sales.
Days of stock is calculated using input like: difference between payment term that we can obtain from customers and from suppliers, lead time between order and delivery, transport time, avoid out of stock etc. After we calculate the days of stock we can calculate the quantity of goods related to the average daily sales.
Another reason that days of stock is used is the ease of use. This parameter it is very important and a less value of this parameter can save a lot of the company money. One days of stock for every products that you have in portfolio will block important financial resources. On the other hand less days of stock increase the risk of out of stock and you will loose sales.
Always you must have a optimum value to not have out of stock or block a lot of money in stock.
If you have problem with stock we can help you to find the optimum.