Fixed and Variabl Costs

The study of cost behavior in physical distribution is quite similar to that in manufacturing because most of the activities are repetitive in nature. Under such conditions physical measurements such as man-hours, units handled, and orders processed can be used to measure the activity. Changes in the level of cost incurred usually are caused by changes in the level of activity experienced.

The first step in understanding the cost behavior of physical distribution activities is to establish the relationship between the amount of each cost and an appropriate measurement of the level of activity. Variable costs are those costs that change in proportion to changes in volume and fixed costs. Examples of variable costs include the handling charges in a public warehouse and the cost of packing material used in a shipping department. Fixed costs include depreciation, security costs and taxes on company-owned warehouses, and the salary of transportation manager.

Some costs are mixed, that is, they contain both a fixed and a variable component. An example might be a warehouse labor. A basic crew of three may be required to cover the normal range of activity. However, if the volume of activity exceeds a certain amount, overtime or part-time employees may be necessary.

In some cases costs may be fixed over a relevant range but may increase in steps. These costs may be referred to as step variable cost or step fixed costs. The major distinction is the size of the steps. For example, in an order-processing department of twenty people labor may be considered a variable cost without making a serious error. This is because a relatively small percentage change in the number of orders could result in a change in the number of employees. However, in a department of three people the cost should be considered a fixed cost since a large percentage change in the number of orders processed usually would be required in order to eliminate an employee. Other examples of step fixed costs include the costs of management salaries, depreciation, and taxes associated with each warehouse that the company owns and operate.

Effective planning and control require that the total costs be separated into the fixed and variable components.

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Nature of Business Market

Like final consumers, an organization purchases products to fill needs. However, its primary need—meeting the demands of its own customers—is similar from organization to organization. A manufacturer buys raw materials to create the company’s product, while a wholesaler or retailer buys products to resell. Companies also buy services from other businesses. Institutional purchases such as government agencies and nonprofit organizations buy things to meet the needs of their constituents.

 Business buying decisions, while handled by individuals, occur in the context of formal organizations. Environmental, organizational, and interpersonal factors are among the many influences in B2B markets. Budget, cost, and profit considerations all play parts in business buying decisions. In addition, the organizational buying process typically involves complex interactions among many people. An organization’s goals must also be considered in the organizational buying process.

 The B2B market is diverse. Transactions can range from orders as small as a box of paper clips or copy machine toner for a home-based business to deals as large as thousands of parts for an automobile manufacturer or massive turbine generators for an electric power plant. Businesses are also big purchasers of services, such as telecommunications, computer consulting, and transportation services. Four major categories define the business market: 1) the commercial market, 2) trade industries, 3) government organizations, and 4) institutions.

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The Shift to Customer Service

You may wonder what, exactly, caused the economic shift to service away from manufacturing. Some of the more prominent reasons are described herebelow:

  • Increased efficiency in technology. Because of the development and improvement of machines and computers, production and quality have increased. Two resulting side effects have been an increased need for service industries to care for the technology, and a decrease in manufacturing.
  • Globalization of the economy: Beginning in the 1960s, when worldwide trade barriers were lowered, a variety of factors have contributed to expanded international cooperation and competition. Since that time, advances in technology, communications, diplomacy, and transportation have opened new markets and allowed decentralized worldwide access for production, sales, and service.
  • Deregulation of many industries: the 1970s saw deregulation of industries (e.g., airlines, telephone) alongwith oil embargoes and political unrest (Vietnam, Iran) reducing US competition while allowing other countries free access to those areas of the world. The rapid deregulation of major US public services, competition (with an emphasis on providing service excellence) has flourished.
  • More women entering the workforce: Because more women are in the workplace, many of the traditional roles in society have shifted out of necessity or convenience to service providers.
  • Desire to better use leisure time: More than ever, workers of developed nations enjoy increasing amounts of leisure time. This has heightened a desire to relax, enjoy children, and do other things they value—people want to use their free time in more personally satisfying ways. To accomplish this, they now rely more heavily on service industries to maintain their desired lifestyles.
  • Expectation of quality service: Most customers expect that they will receive a quality product or service. If their expectations are not met, customers simply pick up the phone to call or visit a competing company where they can receive what they think they paid for. This created a need for more and better trained customer service professionals.
  • Better educated customers: Not only are customers more highly educated, they are also well informed about price, quality, and value of products and services. This has occurred in part because of advertising and publicity by companies competing for market share by the activity of consumer information and advocacy groups.

 My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please contact, Line of Sight

Globalized Production

Globalized production is the sourcing of goods and services from locations around the world to take advantage of national differences in the cost and quality of factors of production. The idea is to compete more effectively offering a product with good quality and low cost. The globalized production services help make businesses more productive and profitable by providing affordable work assistance at a convenient location. My Consultancy–Asif J. Mir–Management Consultant–transforms organizations, makes them relevant, and suggests solutions for success. For details please contact


Asif J. Mir

Supply Chain Management

That’s about all parties directly or indirectly involved in fulfilling a customer request is said to be performing under supply chain management. It not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers. It includes all manufacturing functions involved in receiving and fulfilling a customer request. they include new product development, marketing, operations, distribution, finance, and customer service. Supply chain is dynamic and involves the constant flow of information, product, and funds between different stages. This implies that customer is an integral part of the supply chain. The primary purpose for the existence of any supply chain is to satisfy customer needs, in the process and thus generating profits. Supply chain activities begin with a customer order and end when a satisfied customer has paid for his/her purchase. it thus enwraps images of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. The planning for supply chain involves expert planning and putting together many aspects of functions, process and operations. My Consultancy–Asif J. Mir – Management Consultant–transforms organizations, makes them relevant, and suggests solutions for succes. For details please contact Asif J. Mir

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