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University of Mumbai BMS Notes

Control of Total Distribution cost & Supply cost

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Distribution Cost or the Distribution expenses are the costs that a company incurs to make its goods or services available to the end-users or resellers. It is a broad accounting term that covers several types of expenses.

Total distribution cost (TDC) analysis requires some assumptions. These include current observed rates and transit times for standard air freight, full containerload (FCL), and less-than containerload (LCL) service.

For any company which is involved in distribution, distribution cost is a major bottleneck. There are many different distribution expenses which must be taken care of. Furthermore, these expenses are not consistent and may change from time to time thereby changing the distribution cost as well.

If the shipper is a distributor and it further sells to the retailer and the retailer sells to the end user then all the separate distribution costs at each stage would be included in the total distribution cost. Moreover, in some cases the manufacturer has a production unit at one place and the “product pick up place” by the forwarder at another place. The cost of moving the product from the place of production to the pickup point is also included in distribution cost.

There are other types of costs as well that that are included in the distribution’s costs. Handling cost of inventory at all points for example production place, storehouse, sales point is part of distribution cost. Packing costs are also part of distribution costs. Distribution managerial cost such as the salary expense of distribution manager and his/her office expenses are also part of distribution costs.

Freight cost is usually the most important component of distribution costs. If the product is manufactured and sold in same country then freight cost refers to the “Trucking” or such transport fare to deliver the product.

If the product is sold internationally then it may include “Air Freight, Less than container load (LCL), Day-Definite LCL or Full container load (FCL).” In case the product is transported by air the cost would be higher and if it is transported through LCL the cost would be lower but there is one further point to contemplate i.e. “Transit Time”. The transit time for LCL is longer and the transit time for moving by air is smaller. Covering all ends there is a need for comparative analysis between the product demand urgency and transport cost. If the product is urgently needed and the shipper is losing sales revenue then it is optimum to reduce transit time and increase the freight expense.

Distribution expenses: The individual expenses made by the company for various reasons is known as Distribution expenses. These are individual or repeated transactions happening over time. An example may include; Rent, Salaries, Administrative expenses etc. All these are individual transactions or repeat transactions and these transactions can be called distribution expenses.

Distribution cost: The combination of all distribution expenses made by a company is known as Distribution cost. So, continuing the above example; the total of rent, salaries, and administrative expenses will be considered as distribution cost. In terms of Formula

[The sum of all Distribution Expenses] = Distribution cost

1) Sales returns

If a dealer or a retailer rejects a material, then the material comes back to the manufacturer provided it is in the returns policy of the company. This returned material may have come back due to cosmetic conditions (it was damaged or dented) or it may have come back due to performance issues. In any condition, the returned product is a cost to the company.

2) Direct Selling Expenses

Any expense made towards selling the product to the target customer is a direct selling. Many manufacturers, wholesalers, and distributors carry out direct selling in the regions that they want to expand. They also would like to know the distribution cost of that region. Thus, they consider all direct selling expenses as the primary expense made by the firm.

3) Commercials & Accountancy

It is a government requirement to present all your sales and purchases as well as balance and profit sheets to the government to determine profit earned by your firm. Furthermore, these statements are also important for the firm itself to note the growth year on year as well as to determine the performance and future potential. Thus, commercials and accounts are documented precisely in any firm.

4) Advertising & Sales promotion expenses

If a company wants to establish itself in a new region, it needs to have OOH advertising, it needs to run in-store branding, it needs to run ads in local newspapers or local channels. Thus, the company will be spending a lot towards advertising and promotions which are various forms of distribution expenses.

5) Product and Packaging expenses

The product packaging was good but was not strong. As a result, the packaging suffered a huge wear and tear by the time it reached the customer and the customers returned the product.

6) Shipping and Delivery

With the rise of E-commerce, delivery is a huge focus area for all manufacturers. The stock must be in the market, whether it is on an E-commerce portal or in a retail outlet or with the distributor. Everyone knows that if there is no stock on display, the sale will not happen and this creates friction between the different distribution channels.

7) Trade discounts

Besides sales promotion exercises like advertising and marketing, a company launches several trade promotional exercises as well. This includes giving discounts to retailers, distributors, and suppliers on achieving certain targets.

8) Market research

When reputed companies like Samsung, LG or Sony want to establish themselves in a new market, they buy market research reports from the likes of IMRB or Nielson. These reports may cost hundreds or thousands of dollars. Not only in a new market, even in an old market, a company might want to conduct a satisfaction survey or a survey of new ideas regarding distribution.

9) Credit, Outstanding and Overdue

A distributor who operates in a regional market needs the huge amount of money to conduct business. To arrange this money, the distributor takes a loan from the banks. This is known as an Overdue account. Hypothetically, If the distributor takes 1 lakh from the bank, within 30 days he should give back 1 lakh + 1% interest. Thus, a dealer suffers a loss when his money does not come back from the market in time.

10) Warehousing and handling within warehouse

Warehousing is a major cost of distribution. When a company expands to newer markets, it needs to have new warehouses in each new territory. Domino’s or McDonald’s practically have warehouses for every 3-4 towns so that they can supply to local retail outlets very fast. Because of Domino’s and McDonald’s handle frozen goods (burgers or fries), their expenses are even higher because they need cold rooms and cold chains to deliver the products.

NOTE: Warehousing cost is different from transportation and delivery cost which is calculated separately.

Under these assumptions, the analysis shows:

  • Standard LCL would minimize transport-related costs, but would incur by far the highest inventory-related expenses due to long and highly variable transit times.
  • Using full containerload (FCL) rather than LCL reduces inventory-related costs but to do so would spend more than the inventory-related savings on transport-related costs due to the wasted space in 20-ft. containers occupied by only 2,500 metric tons of freight.
  • Switching to air freight to minimize inventory-related costs would incur the highest transport-related expenses, leading to the highest overall total distribution costs.
  • Day-definite LCL could minimize total distribution costs (sum of transport and inventory related costs). Compared to LCL, the shipper would spend about $600,000 more on transportation to use day-definite LCL service ($1.8 million vs. $1.2 million per year) but would capture approximately $825,000 in inventory related cost savings ($1.3 million vs. $2.2 million per year).
University of Mumbai BMS Notes

Data information needs for HR Manager: Contents and Usage of Data

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The Human Resource Information System (HRIS) is a software or online solution for the data entry, data tracking, and data information needs of the Human Resources, payroll, management, and accounting functions within a business. It is useful for all processes that you want to track and from which you hope to gather useful and purposeful data.

Normally packaged as a database, hundreds of companies sell some form of HRIS and every HRIS has different capabilities. Pick your HRIS carefully based on the capabilities you need in your company. As HRIS has become increasingly sophisticated, the choice among the various systems has become enough to practically paralyze an HR department.

Content to consider as you select your HRIS.

Number of Employees

Remember that even if your company is only a few people today, it may have twice that many or even 10 times that many employees in the future, so pick a system that can grow with your business.

System Capabilities

Another key factor that you must consider is that many HRIS are able to accomplish only part of what you need automation to accomplish. In these cases, you will want to make certain that the components of any add-ons or additional systems work together flawlessly. Again, don’t take the salesperson’s word about the systems working together. Do your research to ascertain that they do.

Performance development plans:

It’s not just enough to have plans if they are recorded in a central system, then they can easily follow the employee from position to position. Senior leadership can run reports to see where people are and what their individual managers are planning in terms of succession planning for their futures.

Disciplinary Actions:

It’s important to keep track of who has been suspended, demoted, or had other negative actions taken against them noted even after the employee leaves your organization. When a company calls and asks for a former employee reference, it’s easy for an admin in the HR department to look up and report back whether or not the person is eligible for rehire.

Training records:

This is especially critical in a company where certifications and licenses are required. In other companies, training records may not have that level of importance, but you may still find that having the information is useful as you develop your employees, a key factor that they want from work.

Training and Support

Check also to see what kinds of training and ongoing support are available for your staff. You should also ensure that the sales consultant’s promises about training and follow-up following the purchase are written right into your contract to purchase the HRIS. And, check with other organizations to make certain that your selected company has a track record of ongoing, helpful support.

Expected Functionality of Better HRIS Choices

Typically, the better Human Resource Information Systems (HRIS) provide overall:

Management of all employee information:

Data such as names, titles, addresses, and salaries are a basic start. Salary and position history, reporting structures, performance appraisal histories, and other critical employee information.

Company-related documents:

This includes such items as employee handbooks, emergency evacuation procedures, and safety guidelines.

Benefits administration:

You will want benefits administration including enrollment, status changes, and personal information updating. In an ideal system, you can allow employees to look up and review their own information, including vacation tracking.

Complete integration with payroll:

This integration will also include other company financial software and accounting systems. When these are connected, you can ensure that paychecks are correct. There is never a disconnect between what the official pay rate is and the information that payroll has. If the systems don’t integrate, it’s easy to update a salary in one system and not in the other.

Applicant tracking and resume management: 

When your system is seamless, the recruiter can click a hired button and all of the information from the applicant is transferred to the employee side of things. This saves so much time because your data entry and paperwork practically disappear.

Data used for

  • Attendance and PTO use
  • Pay raises and history
  • Pay grades and positions held
  • Performance development plans
  • Training received
  • Disciplinary action received
  • Personal employee information, and occasionally
  • Management and key employee succession plans
  • High potential employee identification
  • Applicant tracking, interviewing, and selection
Management Notes

Materials Management, Scope, Methods, Importance, Challenges

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Materials Management refers to the planning, organizing, and controlling of the flow of materials and resources in an organization. It involves overseeing the procurement, storage, and distribution of raw materials, components, and finished goods. The primary goal is to ensure that the right materials are available in the right quantity, at the right time, and at the right cost to meet production and operational needs. Effective materials management helps optimize inventory levels, reduce wastage, minimize costs, and improve overall production efficiency, ultimately contributing to enhanced organizational performance and customer satisfaction.

Scope of Materials Management:

  • Procurement of Materials

One of the primary functions within materials management is the procurement of raw materials, components, and supplies required for production. This includes identifying suppliers, negotiating contracts, and ensuring timely delivery of materials. Procurement also involves selecting reliable vendors and ensuring that purchased materials meet the required quality standards. Strategic sourcing helps businesses reduce material costs and ensure a consistent supply chain.

  • Inventory Management

Effective inventory management is a critical component of materials management. This function involves maintaining optimal stock levels to meet production demands while avoiding overstocking or stockouts. Proper inventory control helps reduce costs associated with storage and minimizes the risk of obsolete or expired inventory. Techniques like Just-in-Time (JIT) and Economic Order Quantity (EOQ) are employed to maintain balanced inventory levels.

  • Storage and Warehousing

Materials management also involves the organization and storage of materials in warehouses or storage facilities. Efficient storage systems, such as proper labeling, categorization, and shelving, help in quick retrieval of materials when needed. The warehouse layout should be optimized for minimizing movement, preventing damage, and improving material handling processes. Proper storage practices also reduce the risk of materials being spoiled, lost, or misplaced.

  • Material Handling

Material handling involves the physical movement, protection, storage, and control of materials throughout the production process. This includes the use of forklifts, conveyors, and automated systems to move raw materials, work-in-progress, and finished goods. Efficient material handling systems reduce labor costs, minimize damage, and improve the overall speed of production processes.

  • Production Planning and Control

Materials management is closely linked to production planning and control. This function ensures that materials are available when needed for production without causing delays. It involves coordinating with the production department to align material procurement with production schedules. Effective planning ensures that there is no interruption in production due to material shortages, and production targets are met on time.

  • Quality Control

Quality control is a crucial part of materials management to ensure that the materials received meet the required quality standards. This includes inspecting and testing incoming materials, monitoring suppliers for consistent quality, and ensuring that defective materials are identified and rejected. Proper quality control ensures that materials used in production do not compromise the final product’s quality.

  • Supplier Relationship Management

Building and maintaining strong relationships with suppliers is a key aspect of materials management. This includes regular communication, performance monitoring, and resolving any issues that may arise. Supplier relationship management ensures that materials are sourced from reliable vendors who provide quality materials on time. A good relationship with suppliers can also help negotiate better prices, terms, and conditions.

  • Waste Management and Disposal

An often-overlooked aspect of materials management is the proper management of waste. This involves minimizing material wastage through efficient planning and use, recycling excess materials, and disposing of waste in an environmentally responsible manner. Managing waste not only helps reduce costs but also ensures compliance with environmental regulations and contributes to the organization’s sustainability goals.

Methods of Material Management:

Material management involves the strategic planning, acquisition, storage, and distribution of materials needed for production or operations. To ensure efficiency and minimize costs, organizations employ various methods to manage materials effectively.

1. Economic Order Quantity (EOQ)

EOQ is a quantitative method used to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. This method balances ordering costs (e.g., administrative expenses) and carrying costs (e.g., storage and insurance). EOQ is particularly effective in ensuring efficient stock levels and avoiding overstocking or stockouts.

2. Just-in-Time (JIT)

JIT method focuses on minimizing inventory levels by receiving materials only when they are needed in the production process. This reduces carrying costs and waste, but it requires precise coordination with suppliers. JIT is highly effective in lean manufacturing environments where inventory flexibility is critical.

3. ABC Analysis

ABC analysis categorizes materials into three groups based on their value and usage frequency:

  • A items: High value, low volume (require tight control).
  • B items: Moderate value and volume (require periodic review).
  • C items: Low value, high volume (require less stringent control).

    This method helps prioritize inventory management efforts and focus on the most critical materials.

4. Material Requirement Planning (MRP)

MRP is a computer-based system used for planning material requirements in manufacturing. It ensures the availability of raw materials by aligning procurement with production schedules. MRP uses data such as sales forecasts, production plans, and inventory records to determine the timing and quantity of material orders.

5. Vendor-Managed Inventory (VMI)

In VMI, the supplier is responsible for managing and replenishing inventory based on pre-agreed levels. This reduces the administrative burden on the organization and ensures a steady supply of materials. VMI fosters strong supplier relationships and enhances supply chain efficiency.

6. FIFO and LIFO Methods

  • FIFO (First In, First Out) ensures that older materials are used first, minimizing the risk of obsolescence.
  • LIFO (Last In, First Out) prioritizes the use of the most recently acquired materials.

    These methods are particularly useful in industries with perishable goods or fluctuating material costs.

7. Perpetual Inventory System

This method involves continuous tracking of inventory levels using technology such as barcoding, RFID, or ERP systems. It provides real-time updates on stock levels, improving accuracy and enabling prompt decision-making.

8. Kaizen and Lean Practices

Kaizen (continuous improvement) and lean manufacturing practices focus on reducing waste and improving efficiency. These methods emphasize collaboration among teams to identify and eliminate inefficiencies in material management processes.

Importance of Material Management:

  • Cost Control

Effective material management helps control costs associated with purchasing, storing, and handling materials. By maintaining optimal inventory levels, companies can minimize storage costs and reduce the risk of obsolescence or overstocking. Furthermore, strategic procurement practices enable businesses to negotiate better prices with suppliers, helping reduce overall material costs. Cost control in material management is critical to maintaining profitability.

  • Optimized Inventory Levels

Material management ensures that the right quantity of materials is available when needed, which prevents stockouts or excess inventory. Proper inventory management minimizes carrying costs, such as storage and insurance, while preventing delays in production caused by material shortages. By utilizing techniques such as Just-in-Time (JIT), Economic Order Quantity (EOQ), and Demand Forecasting, businesses can balance supply with demand effectively, thereby optimizing inventory levels.

  • Enhanced Production Efficiency

When materials are properly managed, production runs more efficiently. Material management ensures that raw materials are available at the right time and in the right quality, which helps prevent production delays. A smooth supply of materials also reduces idle time and downtime in the production process, leading to increased output. Efficient material management also aids in streamlining the workflow within the production process, resulting in higher overall productivity.

  • Improved Quality Control

By ensuring that only high-quality materials are procured and used, material management directly impacts product quality. Quality control measures are implemented at various stages, including the inspection of incoming materials, monitoring supplier performance, and maintaining stringent standards for materials used in production. By ensuring that materials meet required specifications, companies can avoid defects and produce high-quality products that meet customer expectations.

  • Reduced Wastage

An important aspect of material management is minimizing waste in the production process. Through careful planning and monitoring, businesses can reduce material wastage caused by improper handling, overproduction, or defects. Material management helps in ensuring efficient material use and identifying opportunities for recycling or reusing materials. Reducing wastage not only cuts costs but also contributes to sustainability goals by minimizing environmental impact.

  • Supplier Relationship Management

Material management helps build strong, collaborative relationships with suppliers. Regular communication and performance monitoring ensure that suppliers meet delivery schedules and quality standards. By establishing reliable and mutually beneficial partnerships, organizations can ensure a consistent supply of materials, mitigate the risks of shortages, and secure favorable pricing terms. Strong supplier relationships contribute to a smoother, more reliable supply chain.

  • Strategic Decision Making

Material management plays a key role in informed decision-making by providing critical data on inventory levels, procurement practices, and material usage. This data allows managers to forecast demand, plan production schedules, and make strategic decisions regarding procurement and inventory control. By using accurate and timely information, businesses can adapt to changes in demand, market conditions, or supply chain disruptions, thereby enhancing operational flexibility and long-term competitiveness.

Challenges of Material Management:

  • Demand Forecasting

One of the most significant challenges in material management is accurately predicting future demand. Inaccurate forecasts can lead to either overstocking or stockouts. Overstocking increases carrying costs and risks material obsolescence, while stockouts can disrupt production and damage customer relationships. The unpredictability of market trends and customer preferences makes demand forecasting a complex task.

  • Supplier Reliability

Dependence on suppliers for timely delivery of materials is another major challenge. Delays, poor quality materials, or inconsistent supply from vendors can disrupt production schedules. Building and maintaining a reliable supplier network requires continuous communication, evaluation, and collaboration, which can be resource-intensive and time-consuming.

  • Inventory Management

Maintaining optimal inventory levels is a constant balancing act. Excess inventory ties up capital and incurs storage costs, while insufficient inventory leads to production halts and missed delivery deadlines. Achieving this balance requires effective monitoring, accurate data, and the implementation of advanced inventory management techniques like Just-in-Time (JIT) or Economic Order Quantity (EOQ).

  • Technological Integration

The integration of modern technologies such as Enterprise Resource Planning (ERP) systems and automation tools poses a challenge for many organizations. Implementing and managing these systems requires substantial investment, training, and ongoing support. Additionally, resistance to change from employees can further complicate the process, delaying adoption and reducing effectiveness.

  • Quality Control

Ensuring that materials meet quality standards is a persistent challenge in material management. Poor-quality materials can compromise production and lead to defective products, resulting in customer dissatisfaction and increased costs. Establishing robust quality control measures, inspecting incoming materials, and monitoring supplier performance are essential but resource-intensive activities.

  • Cost Management

Material costs are a significant portion of overall operational expenses. Fluctuating raw material prices, rising transportation costs, and tariffs or taxes add to the challenge of controlling costs. Effective cost management requires constant market analysis, strategic sourcing, and efficient material handling to minimize waste and optimize spending.

  • Supply Chain Disruptions

Unforeseen events such as natural disasters, geopolitical conflicts, pandemics, or transportation strikes can disrupt supply chains. These disruptions can lead to material shortages, production delays, and increased costs. Managing such risks requires contingency planning, diversification of suppliers, and a robust supply chain strategy.

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