The Cost of Distribution
In our first blog on the question of costing in the publishing industry, we looked at the cost of printing using a Total Cost of Ownership (TCO) model rather than the more traditional Unit Manufacturing Cost (UMC) method. In this, the second piece on the subject, we are focused on the cost of distribution.
We suggested that in using UMCs, the larger view of indirect costs are missing, such as waste and infrastructure. These costs are essential for management to make insightful decisions. It is often difficult to accurately calculate some of these indirect costs, and the reason for this is a lack of good information. For example, it is not always easy to get good data on the cost of handling goods. In many cases, these indirect costs can be relatively large compared to the core unit manufacturing cost, and so it is essential for management to have this information for capital investment issues and high level challenges of that nature.
The problems caused by lack of good cost data are significantly diminished if we outsource. Publishers should consider outsourcing any business activity that is not a “core competency”, specially in uncertain times like these. Any fixed cost in these conditions can be troublesome and requires a predictable level of activity to support full-cost absorption. Core competencies are those activities that you must do extremely well to be successful – this typically includes activities such as editorial for trade publishers and event management for B2B Media publishers. Examples of non-core competencies for publishers often includes fulfillment and distribution, and may include other activities such as IT.
The nature of outsourcing distribution to a third party is situational and depends on the needs of the individual publisher. It usually entails pick, pack, and ship operations at a minimum, and may additionally include order-to-cash and even sales and marketing services. The benefit of outsourcing distribution in the context of this article is that all those costs become predictable, and equally important, and can flex up and down based on variables such as transaction volume or sales. In our current business climate where both supply and demand are fluctuating wildly, this makes budgeting and budget performance metrics much easier. There are also benefits in acquisitions (where the cost of additional services is typically absorbed by the provider) and in divestitures, where businesses with outsourced distribution are considered more attractive candidates. In addition, there are no real estate and staffing costs. Most ERP software companies (including knk Software) provide expert transition services and comprehensive integration between the provider’s warehousing software and the publisher’s own systems, so that customer service and all internal staff have an accurate view of inventories at all times.
Outsourcing should not be entered into lightly, however. There are risks and one-time costs, including the cultural impact at the publisher. It requires careful transition planning and a strong relationship between publisher and provider, but provides undeniable advantages from a cash perspective.
There are other significant cost savings with outsourcing distribution that may not be readily apparent.
Economies of Scale, Skilled Resources and POD
The first is provided by the expertise of the warehousing staff at the third-party provider. Warehousing is THEIR core competence and they have consequently invested in equipment, skilled resources, and infrastructure that lowers stock movement costs, lowers the numbers of errors, and provides higher customer satisfaction to both publisher and consumer.
The second is provided by economies of scale. This is evident when we consider the higher unit cost of picking, packing and shipping in your own bespoke warehouse, compared to a large warehouse where product movements are made with high tech equipment, in large numbers, when the cost per unit is much lower. It is their business and they do it well, at scale.
The Cost of Trucking
The most expensive part of distribution, however, is the cost of trucking and shipping. There are economies of scale in outsourcing here also, as a book can be packaged and moved more economically with many other items headed to the same destination. But if a publisher combines third party distribution, with a Print-on-Demand (POD) strategy, then the upside of outsourcing distribution increases significantly. This is because with POD, pick, pack, and ship activities are not initiated until a book has been sold. So if the publisher’s POD strategy is combined with a distributed print model, the book can be printed at a facility that is close to the end-consumer which significantly lowers the number of miles that book needs to travel, from where it is printed to where it is read. Needless to say, a reduction in book-miles is a worthy sustainability goal, and far more efficient for the publisher and the supply chain.
A POD strategy is a SELL FIRST PRINT LATER model as we outlined in Part 1 of this series. It diminishes the costs of waste and overproduction, the cost of infrastructure, in addition to lowering warehouse costs and the amount of time a book may spend in it. A Total Cost of Ownership model is extraordinarily important at this time, when demand is inconsistent, interest rates are rising, paper costs and supplies are challenging. Publishers must consider ALL costs, at a macro level, when committing cash to work in process (i.e. to unsold finished product). Ideally, in these conditions, we should not produce anything (print or digital) until the consumer has bought.
Excessive supply chain costs and “Sustainability” amount to the same problem. Consumers will demand that our manufacturers show leadership in lowering the carbon footprint and supply chain complexities of their products, and will demonstrate their preferences with their pocketbook. We can monetize sustainability, and ERP providers can provide some of the metrics and KPIs that will be required to measure and control total costs in the new normal.
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