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Cost And Profits In Distribution

( Originally Published 1939 )



EARLIER CHAPTERS have discussed some of the reasons for the expanding role of distribution in our economic system and have de-scribed and measured the agencies engaged in distributing commodities. It provided a statistical measure of the flow of commodities through the channels of distribution and showed how the successive steps in producing and marketing commodities involve additional costs and result in increased values. At the end of the entire process consumers and other terminal buyers, as shown in the Flow Chart, paid a total of $65.6 billion for finished goods ready for consumption or further use in providing services for consumers.

What terminal buyers paid for goods in 1929 is a very rough measure of the total cost of commodity production and distribution in that year, including as part of the cost, of course, the profits taken by producers and distributors. This total is not exact, since it takes no account of inventory adjustments, sales taxes, depreciation allowances, etc.

This $65.6 billion not only represents the total amount paid by ultimate buyers for finished goods "leaving the system," but corresponds to the sum of the increments of value added at successive stages of production and distribution, plus all shipping and transportation charges. Obviously the increment of value at each step-the difference between the amount paid for goods purchased and the amount received for goods sold-corresponds closely, but not exactly, to the cost incurred at that stage. Thus the $22.4 billion difference between the $69.6 billion received by manufacturers for their goods and the $47.2 billion worth of materials and supplies purchased by them is a rough measure of the costs incurred by manufacturers in processing and selling their products plus profits,if any.

In the case of farming, as well as manufacturing and the primary industries, the increment of value added includes both production and distribution costs. Increments of value added by intermediary dealers and retailers correspond very closely to their distribution costs since their function is almost purely distributive.

1. WHAT WE PAY FOR COMMODITY DISTRIBUTION

How much of the $65.6 billion paid for finished goods in 1929 represented costs of distribution rather than production? This question cannot be answered with any degree of precision in view of the lack of comprehensive data. An attempt to answer it involves analysis of a multitude of public and private reports and statistics and necessitates arbitrary decisions as to what are or are not "commodities" and as to where production stops and distribution begins. Any estimate of the total cost of distribution, there-fore, must be a rough approximation.

Also it must be remembered that a total figure of distribution cost throws little light on whether distributive costs are excessive or distributive operations are wasteful. This is just as true of total costs as of the cost of distributing a specific product. Estimates of the total cost of distribution, and of the various categories of expense which make up the total, are useful primarily as a measure of the areas within which possible economies in distribution may be sought.

The Total Costs of Distribution

The estimated total cost of commodity distribution in 1929 was about $38.5 billion, or almost 59 per cent of the $65.6 billion estimated total cost of producing and distributing commodities. On the whole, therefore, it cost more to distribute goods in that year than it did to make them. Furthermore since the dollar volume of goods sold in more recent years has been consistently less than in 1929 and distribution expenses have been rather rigid elements in the cost structure it seems probable that distribution constitutes an even larger share of the total cost of making goods and getting them into the hands of buyers today.

The largest single elements in the national bill for distribution were the costs incurred by retailers, by manufacturers, and by intermediary dealers and the amount paid for transportation of commodities, as indicated in the following tabulation for 1929:

Supplies and equipment used by distributors count as expenses on their books and thus appear to the extent of their full value in the margins taken by such distributors. But the same supplies and equipment are also commodities which had to be distributed, and part of their value reflects distribution expense and appears in the margins taken by the agencies which handled them. To this extent their inclusion involves duplication. Accordingly, the estimated sales cost of supplies and equipment used by distributors-nearly $100 million-should be deducted from the total costs of distribution to obtain a net figure of $38.5 billion.

The Items in the Bill

Nearly a third of the total cost of distribution was accounted for by retail trade-the expenses of selling finished goods to consumers. Manufacturers' distribution costs accounted for almost a fourth of the total, and transportation costs were nearly as large. Intermediary trade followed in importance, accounting for somewhat less than a fifth of total costs. The $1.1 billion "other costs" shown above include nearly $600 million paid for national advertising (exclusive of advertising expenses included in the costs of retailers or other distributors as described in Chapter 8) more than $300 million of interest charges paid by consumers for instalment loans and about $200 million representing costs of distributing natural gas.

Although all of the figures given above are estimates, the retail and intermediary costs and transportation charges are probably more nearly accurate than the estimate of manufacturers' distribution costs. This $9.1 billion item may be subject to a considerable error in view of the small sample on which the estimate was based.

In addition to selling expenses manufacturers incur purchasing costs which cannot readily be segregated from other operating costs but which have been variously estimated up to $1 billion annually.' These costs might as properly be charged to distribution as to production, but have not been included in the tabulation above. Another item not included in the total of distribution cost is the selling expenses of farmers and primary producers. These expenses, which cannot be estimated, are probably not large, how-ever, except for transportation charges, which are accounted for separately above.

On the whole it seems likely that any possible over-statement of the total of manufacturers' distribution costs is largely or entirely offset by failure to include any estimate of primary producers' selling expenses or of manufacturers' purchasing costs, and that $38.5 billion is a reasonable approximation of the total cost of distributing goods in 1929. This comes to 59 per cent of the total cost of production and distribution. Hence it costs more, on the average, to distribute goods than it does to produce them. A considerable part of the total cost of living can therefore be traced to the processes of getting things to people in usable or convenient form.

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