Trade-off analysis: Next day delivery vs Cost of distribution

Every business strives to provide its customers with the best level of service, or at least the optimal level, but this is not always feasible in terms of cost. As far as distribution activities are concerned, the service-level is determined by trade-off analysis, which compares the volume and quality of features, such as ease of order placing, delivery speed and package tracking, to the cost they incur. While it may be true that businesses today compete against e-tail giants like Amazon and eBay which offer buyers fast delivery at almost no cost, maintaining a next day delivery promise to customers may not necessarily make economic sense, because fast delivery options are more expensive. However, transportation channels are not the only factor impacting cost of distribution, because the distribution systems includes all activities from ordering and inventory management to product storage and physical handling of goods.

Supporting speed of operations


It is all these activities that make up the cost of distribution and if next day or fast delivery can’t be a service level maintained by paying for faster delivery methods, it can definitely be so by speeding up other operations. Inventory management can be quicker, as can stock loading and product retrieval and it all goes back to storage solutions, whether it’s a pallet racking system we’re talking about, a shelving layout or any other type. Even if you are choosing the fastest methods of goods transportation, such as air freight for international deliveries, this effort needs to be supported by speedy operations at your end, which means quick product handling in the warehouse or stockroom. There are two types of activities at manufacturers or suppliers end, inbound activities, which refer to ordering and loading of goods, and outbound activities, which refer to product retrieval, packing and shipping. Both types depend greatly on the type of storage systems you install in the warehouse and the type of handling equipment you use.


Setting overall objectives


Due to the fact that distribution activities don’t actually create sales, they are in fact non-revenue producing, which means marketers register them as a cost. The trade-off analysis is used, as mentioned above, to determine at what level this cost should be set as to not reduce profit margins or register loss. To determine this level, marketers need to set overall objectives, against which the cost can be evaluated, and these objectives can be financial, in most of the cases, but also non-financial, such as product positioning. The latter is an important tool, especially for marketing purposes, and sometimes product positioning trumps financial objectives and it is that when efforts like next day delivery are considered to be worth the cost. Nevertheless, as already said, a speedy delivery is about more than simply choosing the fastest transportation method, it’s also about ensuring a quick product handling process, which means better ordering and inventory management techniques, better storage solutions, less picking errors and so on.