How Can Its Costs Be Cut?

FEW Americans realize how many workers are needed to distribute the output of U.S. factories: some 20 million, or about one-third of the nation's entire labor force. Fewer still know an even more startling fact: it costs more to get the goods to market than it does to make them. Of the consumer's dollar, only 47-c- represents the cost of the product itself; the other 53-c- is the cost of distributing. Example: A television set, which can be produced for $165 (including manufacturer's profit), costs slightly more than that to stock, ship, warehouse, advertise and sell. Moreover, while the cost of production has been falling proportionately since the war, distribution costs have been rising. How can they be cut?

One answer often suggested is to eliminate the middlemen between factory and consumer, thus save the profits that wholesalers and jobbers exact along the route. Many makers of industrial goods have already done this: more than 75% of the goods industry itself buys (e.g., machine tools) goes direct from factory to user. In some lines, however, the trend is in the other direction. Makers of business machines, who used to sell direct, are now selling part of their line across retail counters. -

Bypassing the middleman is not so promising for makers of consumer goods; mass production of goods requires mass outlets. Avco Manufacturing Corp., for example, calculates that it needs 10,000 to 12,000 dealers to get a sufficient share of the appliance market to keep its factories running. The cost of reaching them is often more than one producer alone can afford. Thus a distiller estimated that he would have to employ a minimum of 75 salesmen and invest $500,000 to $1,000,000 to service the more than 32,000 liquor licensees in metropolitan New York alone, a job that an independent distributor was already doing for him much more cheaply. Nevertheless, on a few big ticket items, such as automobiles, big savings can be made by bypassing the jobber and wholesaler.

To cut costs of handling, many merchants pin their hopes on greater mechanization of warehouses. A few enthusiasts foresee the day when electronic brains will do all the paper work and robots all the labor. They have even coined a word for it: "autobution." But savings are being made by much simpler means. By merely loading and stacking goods on pallets, and moving them by fork lift, the cost of hand-loading is cut as much as 50%, and the capacity of warehouses is more than doubled. Such savings are important, but the biggest chance to cut distribution costs is at the retailer's level. Two of the most promising developments have been the rapid increase in automatic vending machines (which last year dispensed more than $1.5 billion worth of goods) and the spread of self-service selling, even to department and drug stores. The self-service supermarket has not only trimmed distribution costs enough to cut its average markup to 16%, but it has done much to change the manufacturer's selling methods. Johnson's Wax, which was once sold primarily through hardware and department stores, now moves mainly through supermarkets, which now sell dozens of items that have no connection with food.

From supermarkets, other businessmen, notably appliance makers, have learned an important lesson: fewer, but bigger dealers provide a larger market for their products than a long string of small dealers. Many have already begun to prune their franchise holders; some are even inclined to close their eyes to cut-rate discount houses simply because they move such vast quantities of goods. Although big appliance makers, such as General Electric and Westinghouse, still keep their distributors, they are shipping more and more goods directly to their dealers. This enables them to cut costs by pooling orders from dealers in the same area and shipping "split carloads" of goods, to them jointly, thus saving in shipping costs by eliminating the higher "less than carload" premium price.

Does the trend toward big distributors mean that the small retailer is doomed? Not necessarily. But it does mean that more of them will be forced to pool their buying power and shipping needs through such organizations as the Independent Grocers Alliance of America (TIME, Sept. 21) to get the same savings as big retailers do from carload purchases, centralized warehouses and mechanized handling.

Manufacturers have also learned an important lesson: overconcentration of production often merely buys factory efficiency at the expense of economic distribution. More and more, manufacturers are building smaller plants designed to serve individual regional markets. Thus, on both ends of the distribution chain, manufacturers and merchants are coming to realize the same thing: the only way to cut down distribution expense is to organize it on the same large-volume, low-profit principle as production.

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