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Assoc Inst T
Management matters
Distribution and marketing decisions
'HE distribution network of Elders and 7yffes Ltd. was an important part of its narketing strategy, Mr. D. E. Hussey, cororate planning officer, told a recent British nstitute of Management forum in London. le was introducing a paper on the physical ;fleet of physical distribution on marketing lecisions.
He emphasized that the delivery service drered was a key part of the way the firm lid business—without that service its activiies would have to be re-shaped completely.
The distribution system's special asset was ts provision of almost complete national ;overage of the market for fresh fruit and legetables. Mr. Hussey claimed that his irm operated in 96 per cent of the market Or urban areas—towns with at least 20,000 iopulation—with direct calls to retailers. Phis involved some 22,000 customers, in:hiding most of the major supermarkets and iepartmental stores.
Many competitors existed both in localzed areas and from the wholesale market Ind to be successful—and therefore profitible—retailers had to be persuaded that Elders and Fyffes could provide the better iervice. So the size of the company had to
x justified by proved efficiency. Being big lad no merit unless it meant bigger profits.
Historically its distribution network had !.volved through the marketing of bananas, o a lesser extent tomatoes and more recent y other fruit and vegetables. Likewise the ;iting of distribution depots was, to a large xtent, the result of history.
But over the past year much management ffort had gone into rationalizing the sysem. The firm had defined many of its 3roblem areas and found the solution in a lumber of them. Marketing factors were mportant in the siting of branches.
Here Mr. Hussey explained that there here 46 branches, each under a manager. With a total fleet of 280 lorries, the average was six vehicles per branch. The branch manager was responsible within his territory for sales, vehicle operation and warehousing. The lorry drivers were also salesmen.
It was management policy to emphasize the responsibility of each branch manager for his branch profits, enforced through budgetary control and planning procedure and reinforced by a management incentive scheme directly related to profits.
Therefore, Mr. Hussey enumerated, the main factors underlying the business were a lorry sales force; a highly perishable product; branch responsibility for both sales and lorry operations; a very competitive marketing situation; seasonal factors; a lorry load that has not been presold and a basic strategic decision that the firm wishes to be in the business of travelling wholesalers instead of operating solely in wholesale markets.
Depot siting was related to market forces because the vehicles' economic range was limited. Marketing factors which influenced depot location included the fact that the firm dealt with a perishable product and its freshness affected price. Therefore the length of time produce was on a lorry was a critical factor.
Experiments
Although experiments had been made with night deliveries it had been found impossible to institute a satisfactory system. Night deliveries were made more difficult by the fact that the effective selling time was the same as the effective delivery time—in normal retail business hours. Nevertheless, non-business hours were used for travelling, of course.
In some circumstances it could be more profitable to arrange for an early return of lorries to the depot rather than call on an additional customer or two. The profit
gained from the sales could easily be lost in overtime among warehouse and clerical staff.
Mr. Hussey said his firm preferred its branches not to be too small because there were economies of scale to be gained and the banana ripening process meant that it had a higher investment per ton of produce than a wholesaler carrying out only a warehouse function. Therefore in practice the vehicles either operated a maximum distance of 25 /30 miles from the branch or. such as those based on the London branches, about half that distance.
With these basic functions established, said Mr. Hussey, a choice of three selling methods was still left. These were operating "shopping" lorries with driver salesmen: pre-sell the vehicle load over the phone: or have salesmen call independently and take orders for later delivery. Alternatively there could be a combination of these methods.
These were marketing decisions which basically affected vehicle costs. But, Mr. Hussey admitted, the cost element also played a part in the decision process. Selling by phone offered the opportunity of fitting vehicle loads to sales and there was virtually no carry over of unsold produce.
But there was a loss of persona] contact and the ability to show produce to the retailer. Experiments with both the first two methods had been carried out but no final conclusion had been reached.
A study Mr. Hussey carried out at a branch showed that its "shopping" lorries made about 30/40 calls a day depending on the distance travelled. Time spent with the customer averaged between 8/9 minutes and it had been found that a 5-ton insulated box van was most suitable, although smaller vehicles were used where applicable.
If, however, the marketing approach was changed, using larger lorries might be considered. But at present a larger lorry would
not help since the limiting factor was the number of selling hours in a day rather than a shortage of lorry capacity.
The third selling method could result in similar cost savings on lorry operation as applied with phone selling but it would add considerably to sales expense. Here Mr. Hussey added that as some competitors use this method they presumably saw merit in it.
An important aspect of the inter-action between marketing and fleet operation was the decision about two years ago that in order to operate profitably some customers should not be served. Two elements had to be considered. It cost something to call on every customer and studies had shown that it took 5+ minutes to sell one case of produce to one retailer but only 15 minutes to sell 10 cases.
In fact many retailers did not buy sufficient quantities to yield a profit to cover the cost of serving them. Secondly there was an opportunity cost in serving any retailer --while with him your representative could not be selling to anyone else.
Danger
Unless customer lists were examined from time to time a real danger existed that changes in distribution channels would not be observed. The spread of supermarkets was an example and it was possible to give so much attention to old customers that the real growth sector was hardly observed.
To be able to make this sort of decision the cost of serving each customer had to be identified. Average delivery costs were of little value here—a situation which was not unique in lorry operation generally.
Elders and Fyffes calculated costs by first identifying the variable costs per mile and the standing costs per day, then applying work-study techniques to allocate costs to customers. Sales analysis over a period gave the basis to calculate profit per customer and such studies had the additional value of isolating driver-salesmen whose call rate would be higher.
The decision to sacrifice old customers on economic grounds required courage to depart from an established and comfortable pattern of behaviour. But Mr. Hussey then gave examples of the value of a selective approach to selling by quoting the savings thereby achieved at certain branches.
At Branch A the sacrifice amounted to only 1 per cent of the turnover—but the net profit improvement per annum amounted to 0,140 and the remaining 99 per cent of delivery could be made by seven vehicles— two less than previously. At another branch 10 per cent of turnover was sacrificed with a resulting reduction from seven to three lorries. At a third branch, with a five per cent reduction in turnover, four vehicles were saved out of an original fleet of 11.
Moreover, Mr. Hussey added, it was found that the concentration of effort on the remaining customers increased sales so that the estimated sacrifice of turnover was found to be pessimistic.
Price decisions had a strong effect on lorry operation. If enough were not charged potential profit was not made. But overcharging led to lorries either ending Up with unsold produce or operating at a lower capacity than they should. Since with all produce except bananas quantities of supplies could be varied at short notice it followed that some very fine decisions had to be made each day, all of which had an effect on the final figure that really mattered—net profit.
Also the reaction between marketing strategies and distribution costs determined the number of lorries and their capacities. The 5-ton lorry fitted present requirements as to speed and capacity. But Mr. Hussey recognized that a marketing decision to increase turnover could alter these specifications.
If it were decided to expand extensively and serve more customers additional lorries would probably be needed. This was because as the present fleet was already being operated efficiently, additional customers could only be reached by giving up old ones. But if expansion were to be expanded intensively, i.e. more was sold to each customer, it might be found the limiting capacity was the capacity of the lorry rather than the driver's time and this could lead to using a larger lorry