The Challenge Of Distribution
( Originally Published 1939 )
1. THE PROBLEM
THE IDEA that it costs too much to distribute goods and that modern methods of distribution are wasteful and inefficient has taken root in the public mind. Every day the consumer is exposed to sights and sounds which seem to confirm this impression-the spectacle of four gasoline stations, one on each corner of a cross-roads, the constant bombardment of costly radio programs selling everything from cigarettes to pianos, and the frequent complaint of the farmer who gets only four or five cents of the fifteen cents we pay for a quart of milk.
Quite naturally the automobile driver and the cigarette smoker and the housewife begin to wonder if all the costs of placing goods at their disposal are necessary and warranted. And since they themselves have to pay all these costs, they question so great a toll on their purchasing power. Added to this is the general belief that while invention and scientific management have increased the efficiency and lowered the costs of making goods, the cost of distributing them has remained high.
It is the purpose of this volume to describe and measure these costs of distribution and to find out, if possible, the reasons for the spread between the cost of production and the price the consumer pays.
Efficiency Drive Came First in Production
A presumption that distribution is less efficient than production is raised by the fact that the field of distribution appears to have been neglected at the very time that the problems of production were being attacked with such vigor and success. For decades the inventive genius of American business has been chiefly dedicated to the lowering of production costs through mechanization and scientific management and to the elimination of inefficiencies in making goods. The results have astonished the world. It is equally true that the same inventive genius has hardly begun to be applied to the reduction of distribution costs. Originality and inventiveness have not been lacking in distribution but in this field they have been used all too often to persuade people to buy more goods rather than to reduce their price.
As early as the eighties of the last century Frederick W. Taylor commenced his epoch-making experiments in time and motion study and laid the foundations of the scientific management movement. In the years that followed, the work of Taylor and his successors brought revolutionary improvements in production technique which were widely adopted by American industry during the World War.
The attack on wastes in production culminated in the work of the famous Committee on Waste in Industry appointed by Herbert Hoover in 1921. The report of this Committee unquestionably made a deep impression on American industrial leadership. The series of concrete findings and recommendations brought out by the Committee resulted in widespread adoption of improved methods and further lowering of production costs.
Organized efforts to attack mounting distribution costs, how-ever, did not begin on an important scale until about fifteen years ago. It was not until 1924 that the federal government recognized the need for further knowledge of distribution by the establishment of the Domestic Commerce Division in the Department of Commerce. At about the same time a series of domestic distribution conferences were held by the United States Chamber of Commerce. Since then there has been a rapid expansion of interest. The Boston Conference on Distribution, attended by businessmen and educators, has worked for the past decade on the problems that beset distribution. The American Marketing Association has brought about the exchange of ideas and experience on educational and research problems. Schools of business and research bureaus connected with the universities have made notable contributions. Also many trade associations in the distribution field have done valuable work through exchange of information, conferences and educational programs.
Not until 1929 was the first Census of Distribution taken. Be-fore that time only sample studies were available and wide areas of distribution had never been described and measured. Further data on American distribution were collected by the Census Bureau in 1933 and again in 1935. From these studies the first picture of quantitative changes in distribution over a period of time is now available. A rising tide of other literature measures the attention which distribution is now attracting from individual businessmen, trade associations, schools of business, and government departments.
Changing Aspects of Distribution
While distribution costs are under intensive discussion and de-bate, new conditions and necessities keep altering the nature of the distributive agencies themselves. Where the movement of goods has met too much friction in one channel, other channels have been open to convey goods more effectively to the consumer. The growth in recent years of new agencies -of -distribution--chains, voluntary chains, super-markets, manufacturer-owned distributive agencies, and retailer-controlled sources of supply-and the decline of older forms bear witness to the practical recognition of costly practices that clung to the old established agencies and impeded their efficiency.
Existing agencies naturally have tried to control or impede the development of these new forms of distribution, particularly in the retail field. A large body of laws has been enacted in recent years to regulate various distributive practices, and particular channels and methods of distribution have been subjected to taxation as well as regulation. Competition has been restricted and regulated by price-fixing devices supported by law. Even the free flow of goods across state boundaries within the country has been handicapped by legal restrictions and protective measures. Distribution is today more than ever a moving, dynamic process, characterized by ceaseless change and by unending resistance to change.
What Is Distribution?
Before looking more closely at the problems and costs of distribution, it is necessary to define more precisely the meaning of distribution. Distribution and production together include a vast complex of activities in which businessmen engage in an effort to make and sell goods at a profit. Both production and distribution are essential and often overlapping aspects of a single comprehensive process-that of supplying the consumer with the kind, quality, and quantity of goods he wants, delivered at the time and place he desires and at a price he is willing to pay.
Economists have made the seemingly practical distinction that production is the addition of physical or form utilities to goods whereas distribution is the addition of time and place utilities. Production, then, involves the physical extraction or creation of useful materials and their subsequent processing, fabrication, and transformation, first into semi-finished and then into finished forms. Distribution includes the transportation of goods from the point of original or intermediate production to the place of sale or further fabrication, the storage of goods until they are needed, and finally the merchandising, display, and advertising of goods and their actual sale or transfer into the possession of the ultimate buyer.
Goods are produced, therefore, by millions of workers in forests and fisheries, on the farms, and in mines and factories, and distributed by other millions who operate ships and railroads and motor trucks, warehouses and storage elevators and the hundreds of thousands of wholesale and retail establishments and other agencies needed to deliver these goods to consumers.
It is a common mistake to regard distribution as confined to finished consumers' goods and thus solely the function of the middleman and retailer, who are usually expected to shoulder the blame for high distribution costs. Distributive operations are a part of every step in the entire process beginning with the production of raw materials and ending with the final sale of the finished article. Actually a large part of the total cost of distribution is borne by producers, manufacturers and wholesalers before the finished product reaches the retailers' shelves.
Defining Distribution Costs
Every time the finished article-or the materials or parts of which it is made-changes hands, selling and clerical expenses are incurred. These may be small in the earlier stages of distribution, involving little more than transportation charges and brokerage fees and commissions. But in the later stages of the process, especially in the case of specialized fabricated products, selling costs may include compensation and traveling expenses of a corps of salesmen, executives' salaries, office and clerical overhead and selling and promotion expenses. To these expenses must be added the costs of physical handling-crating and packaging, shipping and transportation, and frequently storage and warehousing-which are also incurred whenever a product is sold and delivered to a buyer. Other costs of an indirect nature, such as the financing of goods in transit or storage, including instalment credit, as well as the risks and losses arising from spoilage and obsolescence, are also necessarily a part of the cost of distribution.
No one can study our modern economy, however, without realizing that a sharp separation between the functions of distribution and production has to be more or less arbitrary. Much which passes for production contains elements of distribution, while much even of retail distribution contains elements of production. Grocery stores may prepare and package bulk foods for sale; department stores may make or alter clothes to the order of the customer; a restaurant cooks the food it serves; a dealer in electrical goods alters and installs equipment sold to a customer. Other direct and indirect operations in the distributive process, such as assembling, labeling, and sorting and grading, may be performed by either the producer or distributor and are not definitely assignable to either production or distribution. Some general business costs of manufacturers and producers, such as insurance, taxes, and financing, cannot be allocated to either production or distribution but are common to both phases of the business.
With these distinctions in mind, we can try to get a perspective of some of the outstanding facts about distribution in relation to production. In order to get some idea of the changes which have taken place in the amount of effort used to distribute goods in contrast with the labor expended in producing them, the proportion of the population engaged in performing the two functions and the volume of production in the decades since 1870 have been studied.
Our economic structure has experienced vast changes during this period. A host of commodities has been introduced into our everyday life which were undreamed of half a century ago. The development of so-called mass production with its many economies has been the outstanding feature of the last two decades. Yet mass production without mass distribution is impossible. Factories can-not operate unless there is some mechanism for continuously passing their products on to the consumer. This implies not only the physical task of transporting goods but the merchandising and promotional efforts involved in what has come to be known as demand creation. All of these activities require the expenditure of effort and money and it is inevitable that some of the savings effected by mass production have to be utilized in the creation of that mass demand which makes the former possible.