Logistics cost control research of FMCG industry

Cui xin

Beijing Jiaotong University Jiaoda East road NO.18 Beijing China

pisces0601@hotmail.com

Keywords: logistic cost supply Chain analytical hierarchy process utility curve

channel management

Abstract. This article aims to reduce the logistic cost in distribution in FMCG industry. First

analyzed different distribution methods then set up a valuation index system. Fix the optimization

plan for the final logistic operation mode based on the evaluation of the corporation’s risk

preference. Take a multinational FMCG company’s real situation as an example, set forth what

setups should take to optimize the management of supply channel in detail. Finally, realize the

reduction of logistic cost.

Introduction

Fierce global competition drives corporations pay more attention on the supply chain. They

gradually realized just focus on the manufacturing system and ignore the supply chain sales network

is far enough to face the market growth and stress of cost control.

Supply chain theory for logistic. The spring of the supply chain is by reducing the activities not

make profit, cutting down waste in every cycle, strengthen the cooperation’s advantage in

competition. So the logistic activity of supply chain not limited in produce process but also

explored to the whole sites of supply chain, including different companies and logistics inside and

outside of the company [1]

.

The corporations’ performance in FMCG industry highly influenced by the sustainability of

supply distribution system, for their produces’ demand has seasonal fluctuation, and need to

transport multitudinous. At the same time, the amount of value of each product is low, so if the

corporation wants to explore the market share, increase profile, the cost control of logistic is the

first and important thing they should considered [2]

.

Aim and importance of reengineering distribution logistics. In the view of supply chain,

logistic of distribution operation mode is more like an integration logistic mode. Speaking

concretely, manufacture make the products and delivered via the distribution centre, then

distributers and then to the retailer and customers. Or they could directly deliver the products to

retailer and customers, and distribution centre could also deliver the products to customers.

Actually, different logistic operation mode will have different influence of logistic cost

significantly. An analyze from McKinsey shows distribution cost takes 15% to 40% of goods price,

and logistic cost takes over 30%in distribution cost[3].

So it clearly shows that if we could optimize

the distribution channel, and introduce a proper logistic operation mode into use, find a balance

point between cost and service level then the cost of logistic could be reduced.

Advanced Materials Research Vols. 468-471 (2012) pp 1866-1869Online available since 2012/Feb/27 at www.scientific.net© (2012) Trans Tech Publications, Switzerlanddoi:10.4028/www.scientific.net/AMR.468-471.1866

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The dilemma faced by the traditional logistics operation model

Information Distortion. Most large FMCG companies divided the whole market into a few of

large sales zone; pick several distributers in charge of the sale at each zone. In this pattern,

distributers and corporation has separate benefit, they all pursuer to Maximize their own profit.

Sometimes the whole system didn’t get the best profit, as distributers always shows the data good

for them and FMCG companies largely depend on thus information. Only use distributers lead to

they become the only source of customer consuming information. The Bullwhip Effect makes the

things worse, maybe the distributer didn’t intend to exaggerate the needs, but actually they do.

Pros and cons of direct transportation. Pick the distributer as the only way to transport the

goods have another drawbacks, it makes the FMCG companies do the work for distributers not for

customer. When company want to promote some products will largely depend on the cooperation

with distributer, FMCG company in danger of lost the powerful control of the final market, If they

connect the customer directly a amount of promote cost will be saved and combined sale and

logistic closely, this will reduce the logistic cost.

Connect with the final customer directly is good for the FMCG companies to get more real

market information, it also have more influence on the customer with low promotion cost. But the

risk is the cash pay will be delayed. Large retailers insisted a rule of pay that after the goods

received they start to calculate time to the pay the bill. This is not good for FMCG companies, for

they have high requirement of cash flow to ensure the stability of operation. Cash is just one

problem, if the retailer pays after get the goods that mean the FMCG Company will take the whole

risk in the goods transportation. Very different of the way retailers’ pay, they pay first then get the

goods, so the risk of transportation isn’t that high for FMCG companies.

Except the drawbacks mentioned above, deliver directly to big customers, still have some good

points. The goods needn’t transport to the distribute centre, escaped several loading and unloading

links, roundabout transport. So the logistic cost will be reduced and transport time will be less.

Both the two way have advantages and disadvantages so a calculation and evaluation method is

need to introduced to figure out which zoon will be served by distributer and which client will be

choose to be severed directly. Then a new and more reasonable logistic operation mode will be

formed, the logistic cost will be reduced.

The model to redesign the distribution logistic operation mode

Here takes a multinational FMCG company as an example to explain how to set up an evaluation

model and steps to set up a logistic operation mode

Establish the Model. Clear the evaluation and constraint condition of set up a model

1) Maintain the total sale volume in each sale zone

2) Each type of product will maintain the former market share

3) The sales region won’t be reduced

4) The influence of brand wouldn’t be weakened.

Set up the evolution index system of distributers

N Company has five sales regions, based on the data of 2010; the following three are the total

logistic cost company N need to pay for the distributers.

One is: summarize the order volumes and frequency of each distributer by regions, as the rough

calculation of scale.

Another is: Summarize logistic cost by products of each distributer paid by company.

The third is: calculate the total discount of each distributer offered by the company

Advanced Materials Research Vols. 468-471 1867

To form the final logistic operation mode need to evaluation the area separately served by

distributer and served directly as big clients another step is to work out the select standard

Step One : Evaluation

Distributer Evaluation. Select following three indexes to evaluate the distributers

1) The logistic cost to serve this distributer

This cost include two aspects, one is the actual logistic cost, another is the factors could

influence the cost, like frequency of Order, volume of order, the value of products.

All this factors have quantization index.

Value of products: average net sales volume per ton

Customer location: average kilometer per ton

2) The company’s control of the product sale

3) The influence of sales increase

These two indexes are fixed by experience.

Use AHP method to calculate and set up a valuation index shows in Table. 1:

Table. 1

Index level R1 Index level R2 Index level R3 Quantization index

Distributer

manger index

Logistic cost to server

distributers

Distribute

transportation cost

Actual cost Average cost of each

product

Cost influence

factors

Order frequency/volume

Product value

——net sales per ton

Customer location

Discount for

distributers

Control of product sales By experience

Influence of sales grow

Big Client evaluation. Calculated in following two aspects

1) Logistic cost for factory transport to the client

2) Opportunity cost of cash paid when get the goods rather than paid when place an order

Calculated by the interest of bank in the same period

Step Two: Method of decision.

Clarify the clients could be the big one that company direct transports goods to them. Then the

districts that still use distributers are ascertained.

A model is needed by using utility curve to measure what clients could be the direct served one.

Utility curve theory. Utility curve is to reflect the decision maker’s attitude of risks, analyze the

potential gains and lost of a decision to help make a decision. Have four divisions: conservative,

radical, middle, and mixed type. Mixed type means when the lost isn’t that much, the deicide maker

is aggressive, while the lost is a bit high, they turn to be radical.

Established the model. Based on the former research, the company N is more like a mix type.

So use exponential curve: u(x)=k-deax

-becx

to represent utility curve. Parameters is settled by using

the method of descent, could turn five –dimensional nonlinear programming to two–dimensional

nonlinear programming, then could be solved by stipple search method[4]

. The matrix could be set

up as Fig.1

Lateral axis: Control of product sales and Influence of sales grow

Longitudinal Axis: Logistic cost

1868 Automation Equipment and Systems

Fig. 1

Make the conclusion. The result get in the distributer evaluation will be used here, the average

of Control of product sales and Influence of sales grow will be the x-coordinate of point X ,Logistic

cost to server distributers will be the y-coordinate of point X. So a distributer will be located in the

Fig.1.Wheather the area this distributer served will deliver directly or still use the distributer based

on the location of the point X.

Fig. 1 is deviled into four parts:

A: High cost, low control-sale; B: High cost, High control-sale; C: Low cost, Low control-sale

D: Low cost High Control-sale; Line L: in this line, cost and control play the same role

For one area or client, use the Distributer Evaluation and Big Client evaluation calculate

separately, and then turn the result into two points X and Y in the Table. 1.

Compare the location of X and Y use the way of Table. 2 as follows then the decision will be

made.

Table. 2

The point stands for Location of two points

Use the distributer Under the curve Above the curve In different side of the

curve Serve Directly Under the curve Above the curve

The Way finally pick Larger in

x-coordinate

Lower in

y-coordinate

Under the curve

Take every area in calculation of served by distributer and delivered directly separately, translate

the result of the Table. 1 into point, and make comparisons of the points locations, then the

conclusion will get by the introduction of Table. 2.

Conclusions

By setting up a model to optimize logistic operation mode, explored a new way to use

quantification and qualitative to analyze which area should use distributer and which area is more

suitable to delivery directly by factory in order to have a lower logistic cost. This method based on

the FGCM industry and the market is large, but not limit in it, other company could also improve

the model make it more suitable to the real situation.

References

[1] Fei Li: Research of western distribution channel problem. Nankai analyzes of

management.2003, 6 (5).In Chinese

[2] Laurance·G·freedman: Create the advantage of sales channl. China standard publisher.2000,

39:40-41.

[3] Philip Kotler: marketing management ： analysis · plan · execute and control.

Shanghai:Shanghai people publisher,1999.

[4] kewei Fan: Operations Research and management.1999, 8(4) In Chinese

Control-Sales increase rate

C

D

cost

A

B

Advanced Materials Research Vols. 468-471 1869

Automation Equipment and Systems 10.4028/www.scientific.net/AMR.468-471 Logistics Cost Control Research of FMCG Industry 10.4028/www.scientific.net/AMR.468-471.1866