Operating Information And More Efficient Performance
( Originally Published 1939 )
The Committee is convinced that the system of distribution can be made considerably more efficient than it is today. Costs of distribution and the prices consumers pay for commodities can be substantially reduced. The Committee believes that these results can be achieved largely through the voluntary efforts of individual distributors, aided and assisted by government research agencies.
In discussing this area of possible reform it should be recognized that competition compels many distributors to offer services and to sell accounts which they know are not profitable. In many cases, however, a distributor imitates his competitors, not because he is driven to it by competition but merely because he is uninformed as to his own best interests. Among entrepreneurs there is a great deal of blind imitation, quite similar to the "keeping up with the Joneses" of consumers, and many of the most wasteful business practices are the result of this blind imitation. Every once in a while, however, some enterprising distributor discovers that he can do things in an entirely different way and make money in doing it. The growth of chain stores, super-markets and mail-order houses are illustrations of this process of evolution.
It is of the utmost importance, therefore, to keep the field of distribution reasonably open for bold experimentation. After all, the greatest hope for improved efficiency lies in the inventiveness, imagination, and business ability of distributors themselves. By far the greatest improvements of the past have come this way. Those of the future will also-if the field is kept open and free.
In addition to the elimination of laws which prevent the full development of new and improved forms of distribution we strongly recommend concerted efforts by distributors themselves, aided by government agencies, to achieve greater efficiency of operation. These efforts can be both positive-in improving the technique of those already in business-and negative-in preventing or persuading those who are unfit from entering business in the first place.
To some degree efforts to improve the efficiency of distribution must await wider knowledge about its nature and costs. Not only must individual distributors learn more about the costs of their own operations and the effectiveness of the methods they employ, but more information about the functioning of various parts of the distribution system and the system as a whole is needed in order to chart the areas in which economies and improvements offer the greatest promise. Our recommendations in this field, therefore, look primarily toward the provision of better information which should help to avoid losses and lead toward improvement of methods and lowering of costs.
Specifically we recommend the following:
(1). The development and adoption through government re-search and organized commercial efforts of improved methods of distribution cost accounting and analysis.
Much progress in reducing production costs has come from the widespread adoption of systematic and accurate cost accounting methods. In distribution, because of the complicated and diverse nature of the function and the variety of products involved, cost accounting must involve a great deal of arbitrary allocation. A manufacturer is able to measure with a high degree of accuracy the direct costs of every unit operation that goes into the production of a product-and such direct costs bulk larger in production-but from the time the product leaves the factory door until it goes out of the retail store, much less is known about the unit cost of per-forming the various distributive operations.
The retail store owner may know what it costs to operate his store and, with reasonable accuracy, the cost of operating various departments. But little is known about unit selling costs for specific commodities or for purchases of varying amounts, or the cost of specific functions like that of extending credit, collecting overdue accounts or rendering special services. Until costs are more accurately measured, retail and wholesale distributors will not be able to determine, except in a very rough way, what lines of goods are most profitable, what size purchases can be supplied at the smallest expense and which accounts cost more than they are worth.
Pricing practices, which are often arbitrary and unscientific, can also be improved with better knowledge of how distribution and other overhead expenses should be allocated. As pointed out in the research report the arbitrary percentage mark-ups now applied in many cases may often lead to prices which do not result in maximizing sales volume and profits.
(2). The establishment of an institute for research in consumption and distribution, under independent auspices with a liberal endowment.
The field of distribution and consumption economics has been sadly neglected, both in universities and in private and governmental research. Such an institute would not concern itself with the commercial type of market research, or the purely statistical field of government agencies, but with exploring the broader and more important social implications of the kind of distributive system (which means the kind of economic system) we have. It could do a great deal to promote the collection of better information in this uncharted area and to foster the objective study of many of the more or less controversial issues, such as chain store taxes, resale price maintenance, etc., which have too often been avoided, except by interested parties to the controversy.
(3). The provision by government agencies of more comprehensive, accurate, and promptly available statistics on distribution.
One of the reasons for our inability and failure to improve methods, increase efficiency and reduce costs in the field of distribution is the lack of basic statistical information in this important area. Distribution statistics are far less satisfactory than those in the field of production. For instance, the first Census of Distribution was not taken until 1929 while the Census of Manufactures was first taken more than a century ago, and for many years has been on a biennial basis. It is reasonable to expect that improvement of the statistical background for planning distributive operations will result in the gradual improvement of distributive methods, not only because individual distributors will be better informed, but more important, because public policy can be more intelligently formulated.
We urge consideration of the following suggestions looking toward provision of better information on distribution:
(a). Census of Distribution at Five-Year Intervals
A complete Census of Distribution should be taken at five-year intervals coordinated with a complete Census of Manufactures and of other phases of business. It is desirable that unless the Census of Distribution is taken at the same time as the Census of Manufactures, the former should include reports from manufacturers as distributors since they are an integral (but little known) part of the whole system of distribution.
(b) . Annual Sampling Reports
An annual Census of Distribution on a sampling basis covering the largest units should be taken for intervening years.
(c) . Occupational Distribution Census
The decennial Census of Population should provide information on occupations of gainful workers in terms comparable with the statistics on employment obtained in the Distribution, Manufactures, and other business Censuses. Occupational data on persons engaged in distribution should establish clear distinctions among them in terms of (i) economic status [e.g., employee, employer, self-employed, etc.) ; (ii) industry, trade, or phase of distribution [e.g., wholesale by types of commodities, retail by types of stores, etc.]; and (iii) occupation or kind of work [e.g., selling, clerical work, bookkeeping, etc.].
(d) Commodity Reports
Statistics on production of specific commodities obtained in the quinquennial and annual Censuses and the statistics on distribution of the same commodities should be made comparable.
(e) Current Statistics
Current statistical series (e.g., monthly statistics compiled by Department of Commerce) on key commodities and lines of trade should be improved and expanded with special emphasis on the measurement of inventories held at various stages throughout the productive-distributive process.
(f) Financial Statistics
Income and balance sheet data compiled by the Bureau of Internal Revenue and the SEC should be made available in detail for various specific trades and branches of distribution.
(4). The widespread expansion of analytical studies of distribution costs, methods, and results.
The amount of research in the field of distribution is negligible as compared with the funds and energies devoted to research in the field of technology and production-in spite of the fact that distribution, in all its phases, represents a more important area in our total economy than does production. The studies made to date by government agencies, particularly the Bureau of Foreign and Domestic Commerce, and by many universities, have been extremely helpful in the improvement of distribution methods. On the whole, however, such research has been on a very limited basis and its value would be vastly increased if it could be made to cover much larger samples and wider areas. Many of the more progressive and successful individual distributors have found that analysis of their own methods and results yields handsome dividends in the form of lower costs and larger profits. The effectiveness of such self-analysis will be greatly enhanced by more general studies conducted by other agencies.
Among the kinds of investigation which we believe merit serious study are the following:
(a) Prices and Price Spreads
Very little reliable statistical information exists on the comparative spreads between the cost of production (or factory price) of commodities and the price paid by the ultimate consumer. Many of the statistics presented in the research report were obtained on a confidential basis by direct inquiry from distributors. Price spread figures should be made available not only for various goods, but more especially for different distribution agencies handling the same lines in localities where conditions are similar. Of even greater interest would be a study of the prices of comparable goods sold through various kinds of outlets-small in-dependents, department stores, chains, mail-order houses, super-markets, and cooperatives.
(b) Cost Relationships
Studies are urgently needed of the effect on the cost of distributing comparable items of various important variable factors such as additional services of various kinds-credit, deliveries, etc.; size of store; population of locality; stock turnover; etc.
One great advantage the manufacturer has over the retailer is that he can usually determine with some degree of accuracy the unit costs of specific operations in producing specific commodities. The retailer, on the other hand, may know his total costs (although many of them do not), but he knows very little about the cost of selling an alarm clock for example, compared with the cost of selling a toothbrush. This is important if he is to maintain a balanced stock of goods best adapted to the size and location of the store, and to achieve a profitable rate of turnover. In some cases such a study might indicate that many lines should be eliminated because of slow turnover, wastage, obsolescence loss, and high cost of selling, while perhaps other lines of goods might profitably be added.
(c) Advertising Costs and Results
Such studies should be made for specific products, lines of trade, and advertising media. We probably know less about the results of advertising than about almost any other phase of business, and yet it has appreciable and increasing effects on the total costs of distribution.
(d) Effects of Lower Prices on Volume of Sales
Other things being equal, the lower the price the greater the consumption. But commodities vary widely in the elasticity of the demand for them. Many manufacturers and distributors could undoubtedly increase total profits for goods with an elastic demand by lowering prices and widening markets. By this procedure both the consumer and the entrepreneur benefit because the consumer gets more goods for less money and the seller gets larger total profits, although possibly smaller unit profits. Studies should be made of the effects of increased volume through lowered prices for specific commodities. As pointed out in the research report, pricing policies in many cases appear to be based on conventional percentage mark-ups without consideration of the effects of prices on volume of sales. Better information on demand elasticity for various types of commodities should lead to more intelligent price policies.
(e) Causes and Effects of Business Mortality
All available figures point to an excessively high rate of business mortality in the distribution field, but we know very little about the causes of failure in this field and of the effects on individuals who have incurred losses in the retail business. Also we know little of the losses to property owners through vacancy, to labor through unemployment, etc., resulting from an excessive mortality rate in distribution. The Committee recognizes that the evils of too many retail outlets and excessive business mortality might be at-tacked through the device of licensing retail outlets either on the basis of economic need or on the basis of proven competence and adequate capital requirements. Such regulations have been established in foreign countries. We believe, however, that there are real dangers in the adoption of licensing policies and that in any event more information about the causes and effects of business mortality in distribution is needed before such drastic policies should be considered.
None of these studies is worth making, however, unless the results are made widely available, in clear and simple language, to schools and students in the field and to those who can profit by them-to those who have any direct or indirect influence over the policies of distribution agencies. We urge that government and private research organizations devote a considerable part of the resources available for this work to the proper dissemination of their findings.
(5) The wide establishment of training courses for distributors.
We urge the development of courses in high schools and other educational institutions to train retailers and distribution managers for various kinds of retail store management and operation and also to fit rank and file workers to carry on the routine processes more effectively. Some of this is being done, but much more can be done. Such training should be available not only for persons prior to entering the field of distribution, but for active retail owners and executives as well. Training courses of this kind might also be effective in deterring many unqualified persons from making unprofitable ventures into the field. Certain foreign countries have long recognized in a practical way the urgent need for better preparation for the hazards of retailing and other types of distribution.
(6) The dissemination by government agencies and educational institutions of information about the difficulties of survival in re-tail trade.
We recommend that the proper government and educational agencies make widely available in simplified and understandable form information on the hazards and difficulties of small-scale distribution and on the minimum requirements of capital, knowledge, and training required for different trades. This should be of some help in getting more efficient distribution and reducing business mortality. This proposal would be parallel in a sense to our recommendation that the government and other groups engage in more vigorous and effective consumer education.
(7) Development of cooperative research and educational pro-grams between the Department of Commerce and university schools of business.
For many years agricultural experiment stations maintained at various state universities in cooperation with the Department of Agriculture have been an important influence in the development of more scientific and profitable agricultural methods. Comparable facilities and assistance have not been available for distribution and other business organizations, which means that small businesses, particularly, have been denied the educational and research advantages enjoyed by farmers. We believe that a cooperative program of research and education involving collaboration between the Department of Commerce and qualified university schools of business such as is now being considered by Congress deserves support. Such a program would go far toward effectuating many of the detailed suggestions made above.
C. COMPETITIVE RESTRICTIONS AND REGULATION
The Committee believes that the field of distribution has not yet reached a point where it is possible for any one to determine its ultimate outlines, much less to decide what its ultimate forms should be. The evolutionary process has been very much in evidence in re-cent years. Under the driving force of competition all kinds of experiments are constantly being made. In this situation, new legislation which tends to freeze the distributive structure into its present mold will probably interfere directly with the ultimate lowering of costs in the field. This is likely to be particularly true of "fractional" legislation, enacted in the interest of some special group without regard to eliminating competitive abuses or establishing fair competition.
We, therefore, strongly recommend:
(1) The immediate repeal of all laws which are designed merely to preserve, or to destroy, some special group in the distribution structure, without regard for the general public interest.
The outstanding illustration of this type of legislation is the chain store tax law, in most cases unjustifiable on economic grounds. At-tempts to freeze the structure already in existence, or to control the process of its development, or to tax certain types of distributors out of existence, or to give special governmental financial aid to others, are similar illustrations of measures which are unjustifiable, as a rule, on economic grounds.
(2) The prompt repeal of all state legislation designed to discriminate against the products of other states and to restrict the free movement of goods between the states.
Comparable to laws designed to promote the interests of one group of distributors at the expense of other groups is the flood of state legislation passed in recent years for the purpose of protecting the business organizations of one state against the competition of products from other states. The Committee believes that this growth of sectionalism on the part of the states is a serious threat to the interests of consumers throughout the United States.
As pointed out in the research report these state legislative and tax barriers to interstate trade have taken many forms. In some cases restrictions arise from the legitimate exercise of state quarantine powers. In the vast majority of cases, however, these laws have been passed for the obvious purpose of discriminating against the use within the state of competing products from other states, in the effort to promote local industry. As such they are in effect tariff barriers erected within the borders of what has always been proudly regarded as the "greatest free-trade area in the world." Even their immediate advantages are dubious since they promote prompt retaliation on the part of neighboring states. In the long run there can be no doubt of their harmful effects in stimulating the uneconomic development of industry, in increasing production and distribution costs, and in raising prices to the consumer. In condemning legislation of this character, however, the Committee recognizes that real advantages are to be gained in some instances through further decentralization of industry. The advantages of a high degree of concentration of production in favored areas are sometimes offset by the resulting higher transportation and distribution costs. And in some cases geographic concentration of industry has been due as much to the artificial influence of railroad rate structures as to the natural advantages of location. We believe that these artificial barriers to economically desirable decentralization are just as harmful as is state legislation designed to protect local industries.
(3) The strengthening and more effective administration of existing laws designed to prevent and destroy private monopoly, to eliminate price-fixing, and to prevent other monopolistic practices, except under government sanction and supervision.
The Committee recognizes that although competition plays a vital role as a regulator of our economy, it is nevertheless responsible for a considerable part of the cost of our distribution system. The necessity for establishing some limits to the destructive effects of some forms of competition has long been recognized. The civil law has long branded certain unethical competitive practices as unfair. In addition various statutes establish limits beyond which competition may not go, for example, into the adulteration of goods, or the cutting of wages below some established minimum. Such types of competition are already-outlawed. `
Less concern has been given to the fact that competition may be so excessive in other directions as to greatly increase costs far beyond any corresponding benefit to consumers. In many phases of distribution competitors must meet each other's efforts on an ever-rising competitive spiral, or quit the contest. Many results of this situation are obvious, for example, multiplicity of brands and out-lets, and competitive advertising. If present trends continue, this type of competitive cost gives promise of mounting even higher. Some device must be developed to establish limits to the cost-increasing excesses of marketing competition if we are to prevent a breakdown of the competitive system through too much competition. In the face of this danger the public welfare requires that certain limits be placed upon unbridled competitive warfare so as to preserve that healthy competition on which a free economic society must be based.
As competition will be limited in various ways it is important that we should prevent improper limitations which would injure the interests of consumers, and that we should foster only such limitations as will make for the long-run interests of the community as a whole in promoting security, stability and efficiency, and a steadily increasing standard of living in terms of more and better goods available to consumers.
The Committee knows that the problem of monopoly is not a simple one. Available evidence is not wholly revealing as to the kinds of concentration, or monopoly, that have advanced the American standard of living and those that have limited it. Economic judgment should enter into administration of the anti-trust laws to a greater extent than their real or imagined formalism has so far permitted. Instances of bald collusion on price or on production for private benefit should be prosecuted systematically and the facilities of the Department of Justice strengthened to that end. On the other hand those instances of collusion contrary to the letter of existing statutes, but embraced for the purpose of mitigating demonstrable distress or maladjustment, should be judged in terms of their ascertainable effects. Common recognition that there can be both use, and abuse, of tariffs and patents, and of administrative and financial interlocking relationships, implies the need for discretionary appraisal.
The Committee does not at this time presume to suggest the structural changes in our administrative machinery which would be necessary for such discriminating treatment of the problem. Much can be said for a business court, and a separation of prosecuting and judicial functions. There is something to be said at the other extreme for a merely advisory economic committee as a part of the Attorney General's staff. The Temporary National Economic Committee has already addressed itself to these problems, and final judgment will properly await the conclusion of its fact finding and deliberative program.
The instinctive reaction to legislative sanctions for resale price maintenance and for mandatory retail mark-ups is that they run counter to the fundamental principle of a free market with prices competitively determined. An authoritative study of the actual effects of these laws is still lacking, and as long as a departure from a time-honored principle has been made by a large number of the states as well as the federal government, the country's opportunity to inform itself on actual consequences might well be utilized be-fore a return to conventional policy is blindly insisted upon. But because these laws are a departure from principle, a heavy burden of proof rests upon their sponsors. Nevertheless it is not likely that any political solution that denies them in this dynamic stage the opportunity to make their case is likely to settle the issue. It is too late or too early for positive opinions.
(4) Permission by appropriate government agencies, under specific statutory authority, for distributors to agree on the limitation of certain costly excesses in competition where the result will be to reduce the cost to the consumer.
Examples of some ways in which this might be done in the interest of the public are:
(a) Agreements between instalment finance companies on more conservative contract terms;
(b) The control of advertising expenditures by agreement among advertisers in particular lines;
(c) Agreement among department stores to charge separately for delivery, credit and returned goods privileges; (d). Agreement among distributors on credit terms to be extended to buyers, e.g., that accounts overdue more than a month should carry interest at a reasonable rate, etc.; and
(e) Agreements by distributors on standardization of costs and charges which are concealed in the price of the goods they sell, providing it is possible to prevent an agreement on the price itself.
If such special services and advantages, most of which are a form of concealed price-cutting, could be standardized, the price of a commodity itself would have a much higher "visibility." Permission to do these things might sharpen and focus competition on the place where it should be focused, on price. If a competitor wants to get additional business and he cannot do it by extending costly and frequently harmful services, such as over-extension of credit, he will be compelled to get the additional business by cutting prices; and this, from the immediate standpoint of the buyer, would be desirable. On the other hand when prices are somewhat frozen, as under resale price maintenance, it would be unwise to limit other ways in which competition might operate.