In calculating the real cost of handling and transport to customers, there are three obvious components: the distance from your factory or warehouse, the size of the consignment (measured in pallet spaces occupied on a vehicle) and the handling activity involved.
Once manufacturers have confidence that they are capturing their costs accurately, they ask who is really driving the costs of handling and transport: the retailer by his choice of trading geography and outlet size, or the manufacturer by his choice of where to make specific products relative to UK demand.
I will use a couple of examples to illustrate this issue. Waitrose, with its south-eastern bias and depots in Bracknell and Milton Keynes, creates a low cost to serve for manufacturers who make and store products in the Home Counties. But is it fair, in calculating profits derived from trading with Waitrose, to base this on the accidental fact that Waitrose is lower cost to serve than a smaller, Scottish cash & carry customer?
Waitrose orders in mainly full pallets and full loads. The cash & carry cannot. It therefore incurs, for the Home Counties manufacturer, a high cost for distance and consignment size plus warehouse case picking. If we assumed an average five pallets per order for the cash & carry and 40% case picking, the real cost of getting the goods to (say) Glasgow will be about £1 per standard grocery carton. To Waitrose, the cost from the same manufacturer will be about 30p per carton. The difference of 70p per case would be 5.8% of a case sold for £12.
If we assume that Waitrose does not buy 5.8% cheaper than the cash & carry, there will be a net trading margin in favour of Waitrose.
Is it fair to penalise the cash & carry versus Waitrose just because the cash & carry happens to be far from this manufacturer's base?
The answer is clear. Provided you are sure you have correctly attributed the cost to serve Waitrose and the cash & carry, why should each not bear its true costs and be judged on that basis?
After all, whoever suggested that life was fair!
Tim Knowles is partner at supply chain consultancy TKA.