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by Wroe Alderson

A Formula for MeasuringProductivity in Distribution

Long before TQM came into vogue, managersgrappled with the issue of marketing productivity.

One approach lo ihc discussionof piixluctiviiy in disiributionis to describe the many facets(if the problem and Ihen toindicate the type oi index

required. An alternative approach is tobegin by proposing a specific formula forcomputing an index and then to considerthe grounds on which it is based and itslimitations in use.

The formula that follows rests on theassumption that an index of productivityis a ratio between input and output. Thus,the basic problem is simply tliat t)f devel-oping suitable expressions to representinput and output in distribution. A practi-cal index is one that makes use of readilyavailable data. At the present rather spec-ulative state of consideration, it is justifi-

EXECUTIVE BRIEFING

able to conceive of an ideal index in rela-tion to the measurement objectives andleave the problem of collecting the neces-sary data for discussion at a later time.All of the data required, however, can bereadily obtained by various research andstatistical methods.

The Formulaho equaiiim 1 have adopted to repre-sent the output of the distributionsystem is:

The corresponding equation for input indistribution is:

Total expensesof distribution

Average hourlywage rate

Man-hourequivalents

TNumber ofretail unit sales

Number ofshopping hours

Unit sales pershopping hour

Unit sales per shopping hour and man-hour equivalents should both be reducedto index form, adopting the same baseperiod for the two indexes. The ratioexpressed by the two indexes may also beregarded as an index. This final step inthe calculation of the index i.s expressedas follows:

PriKluctivityin distribution

I n each issue of Marketing Management we reprint an article from apast issue of our sister publication, Journal of Marketing. In this issue,

we reprint an edited version of Wroe Alderson's article from April 1948 thatdeals with an ongoin}^ problem: measuring marketing productivity. Is mar-keting productivity an oxymoron? To an accountant, perhaps, but market-ing has heen slow to adopt the TQM principles of the '90s. How are wechallenging ourselves to cut waste, while improving productivity? Aider-son's article is as appropriate today as it was 45 years ago.

T

Index of unit salesper shopping hour

Index of man-hourequivalent,s

Output Phase, he formula for Che output of thedistribution system starts from theconsumer's point of view and tries

to determine in the broadest tenns what itis that the distribution system providesfor the consumer.

If there were no distribution system atall, each consumer would have lo visitthe farm or factory or handicraft shop inwhich desired products were made,make selections, and arrange for trans-portation home. Compare this standardof zero distribution with what actually

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happens and the difference representsthe output of the distribution system.

The job [Tciformcd by distribution cunbe divided inlo two broad pha.ses; onerelated to the number and variety of prod-ucts ottered to the consumer and the otherto the amount of time the consumer mustspend in making .selections and otherwiselaking advantage ot what the system offers.In other words, because it is the business ofIhc distribution system to transfer goods toIhc ct)nsunier. one consideration is thenumber of transfers effected and the otheris the burden—in time and effort—thatthese transfers place upon the consumer. Itwould not be possible to make a fair com-pari.son of two systems or situations in dis-Iribulion without taking account of botb.

The number of retail unit sales is set upus tbe broadest single measure of the ser-vice a consumer gets from distribution.This figure has been going up steadily yearafter year, for a number of reasons:

• Tlie greater and greater range of productsihe average family must buy to sustain thestandard oi living.

• The increasing rapidity of style changesor other forms of obsolescence.

• The greater frequency with whicb con-sumers wi.sh to buy products to serve tbeirimmediate convenience, throwing thefunction of storage back into the distribu-tion system.

• The number of places in which the sameconsumer may want to buy a product. Asimple example is a consumer's immediatedemand tor cigarettes at home, at work, orat various places wbere he may be taken bytravel or recreation, such as trains, boats,ballparks, etc.

In general, it seems likely that thereis a simple, functional rclationsbipbetween the growing complexity of thestandard of living and the growing needlor distribution services. The number ofretail unit sales seems well-adapted toexpress this relationship.

The cost to the consumer of making useof the distribution system can best beexpressed by the number of shoppinghours. Obviously, purchases ditter greatlyas to tbe amount ol sbopping timerequired. The purcbase of an automobile ora major appliance may call tor a goodmany hours from hoth husband and wife,spread oui over a period of several weeks.

Shopping for a single item of clotbing maycause the consumer to visit a number ofstores or m;ike several shopping tripsbefore final selection. Staples, such as stan-dard foods, drugs, and tobacco, can be pur-chased in a much shorter time.

Many transactions are routine transac-tions because tbe consumer already bas aclear idea of what is desired and may sim-ply be reordering something that has beenused many times before. Otber transactionsare fully negotiated, witb a lull di.scusslonof price and terms as well as the quality

Management is the:oordinaling factor thattakes responsihiliiy for^ombining the factors ofproduclion in the mostfavorable proportions^m

and special features of the product. Thus, itwould be very useful to establish a percent-age of routine transactions among all con-sumer transactions.

The difficulty here is the lack of sim-ple categories; tbere are many in-betweensituations tbat are not lully negotiatedand yet are not wholly routine. However,tbe greater the percentage of routinetransactions, the fewer the number ofsbopping bours, assuming the schedule ofproducts to be purchased by the con-sumer is the same. Thus, the number ofshopping hours rellects ibe extent towhich consumer transactions have beenrendered routine, wbicb is certainly oneof the major ways in wbich the distribu-tion system serves the consumer.

Tbere are a number of detailed prob-lems such as what is to be counted asshopping hours. Tbe general solution pro-posed is to count only tbat time which theconsumer spends on shopping trips out-side the home. That would leave out timespent in talking to house-to-house sales-men or making selections from mail-order catalogues. Both tbe difficulty ofsegregating such use of time and its rela-tively small place in the total lead to thisconclusion. Tlie same considerationsapply lo tbe time spent in reading or lis-tening to advertising.

All shopping time in retail stores wouldhe included, despite tbe fact that con-sumers may enjoy shopping. Some sales-

men enjoy .selling, bul ibey are still paid torthe time spent in selling since this time ispreempted against any other use.

Input Phase

The fomiula lor ibe input in dislribu-tion is relatively simple. In thenumerator is tbe dollar cost of tbe

whole distribution system over ihe year,including retailing, wholesaling, and thesales costs of manufacturers. This figurefor total distribution expense cover's theannual cost of amoiiizing buildings andequipment as well as the cost of labor.

Investment and labor cost are to someextent interchangeable. Tlius, a self-servicestore reduces its labor costs by using moreIloor space and better fixtures in wbicb todisplay the merchandise for consumerselection. Tbe relative cost of space andequipment is correspondingly increased.

In tbe denominator is tbe averagehourly wage rate in distribution. This rateis divided into the total cost ot distributionand not merely into the cost of labor. Tbus,the labor paii of tbe total cost is reduced loa man-hour basis. Tiie non-labor part of thetotal cost is considered as a substitute forlabor and the price adjustment is made ontbe same basis. Tbe resulting concept ofman-hour equivalents represents the totalinput lor distribution, adjusted to allow lorthe changes in the cost of labor.

It is believed by some that tbe adjust-ment by wage rates is more appropriatethan some other methtxl of adjusting torprice trends. The perennial problem ofmanagement in a distribution business is lobalance tbe use of labor against ibe allema-live use of space and equipmenl. Laboralready represents the major share ot" thetotal cost and is becoming a still larger por-tion year by year.

The validity of ibe Input equation per-haps becomes more appiu'eni when it isbroken down into two parts, namely, manhours of labor plus man-bour equivalentslor distribution costs other tban labor.

The ratio belwcen input and output asdefined and measured should provide a lairretlection of productivity in distribution.The two quantities are not directly compa-rable and. hence, need to be reduced to anindex basis before setting up the fmal ratio.That means that some base period has to betaken as 100% in each case. No logical dif-I'LCulty is involved in tbis step because thepurpose of ibe llnal index is to measurechanges of productivity in distribution,ratber than to make a critical comparisonof output and inpul tor any given date.

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Applications

T be formula presented attempts tomeasure the productivity of the dis-tribution system rather than the pro-

ductivity of distribution workers. It is well-adapted, tberefore. to several purposes forwbich such an index might be used.

One purpose is to make a runningcomparison of the relative efficiency ofmanufacturing and distribution. Anotheris to provide a yardstick tor evaluatingchanges in distribution. A third migbt beto compare the distribution systems of dif-ferent countries, such as Russia and theUnited States.

All of these purposes are primary pur-poses ot" the marketing economist or distri-bution engineer whose function is to helpbring about greater efficiency in specificcompanies or marketing situations.

The proposed formula is not directlyadapted to problems of wage negotiation inthe distribution field. It could not be usedin itself to justify a percentage increase inwages in line with a percentage increase inpnxiuctivity.

Perbaps it's an illusion to suppose that aproductivity index could ever be adequateto that purpose. Attempts had been made touse the cost-of-living index in wage negoti-ations until labor iind management bothbegan to realize tbat wage increa.ses mustalways outrun increases in the cost of liv-ing in an expanding economy.

Similarly, a productivity index wouldnot provide the fmal answer in wage nego-tiation even if it were possible to detlne thespecitic contribution of the worker to pro-ductivity in distribution. Alter tbat calcula-tion had been completed, it might still benecessary to grant wage increases in excessof any increase in labor productivitybecause of both competitive necessity andpublic policy.

At least two important uses for theindex would serve less directly. Oneinvolves wage negotiation and the otberthe evaluation of the efficiency of succes-sive steps in the distribution process suchas manufacturers" sales departments,wholesalers, and retailers. In each case,problems of imputation grow out ot jointcontribution to an end result.

Wage Negotiation

S everal indexes of productivity in botbmaiiutacturing and production usethe number of workers in the field to

represent input. This is equivalent logicallyto attributing all increases in productivity

to labor. The validity of an index for use inwage negotiation is certainly affected ifsuch an assumption is implicit in the index.

Actually, prtxluctivity in distribution—as in manufacturing—is the joint productof management and labor. It is dilTicuIt tomeasure their separate contributions lo pro-ductivity because this is a clear case ofmultiple causation, like the contributions ofthe sun and the rain to a crop of wheat.Management can further an increase inproductivity by providing better workingtools and a better working environment.Labor can contribute by making moreeffective use of the ttwls provided. Eithercould be completely frustrated without thecooperation of tbe otber.

The trend ofxoageincreases 7nay often

utrun increases in laborroduclivitt.

Management is the coordinating factorthat takes responsibility for combining thefactors of production in the most favorableproportions. In distribution, this means thecoordination of store and warebou.se facili-ties, advertising expenditures, and workersengaged in .selling and other functions.

The problem of coordination is con-stantly chiinging because of the changingvalues of capital investment and labor.Slow turnover was much more costly whenthe Department of Commerce was engagedin sucti studies as the Louisville GrocerySurvey than it is today. As the author ofmany of those studies, I have watched thecost of labor over the last 20 years becometbe main concem of management in distri-bution just as it is in manufacturing.

Among the phases of management tbatshould be given special consideration withrelation to prcxluctivity are planning, pric-ing, and promotion.

Coordination of resources in distribu-tion is largely in the form of planningbecause it takes time to provide stores,warehouses, and trained personnel. Deci-sions about needs must be made well inadvance of tbe event. Mistakes in judgmentdetract from the maximum productivity ofthe distribution system.

Tbe timing of improvements also is crit-ical because low-cost distribution dependson settled routines and, yet. routines con-stantly must be moditled to meet changing

conditions. A proper slogan for the distrib-ution system as a whole is the sign thatoften appears in front ot a store that isbeing remodeled: "No interruptions tobusiness while alterations are in progress."

An extremely impodant function ofmanagement is lo establish eflective prices.Regardless of all theories of monopolisticcompetition, administered prices, or maxi-mization of net revenue, an effective priceis one tbat causes goods to move. Withoutan effective price, any other tbnn of eftl-ciency achieved in distribulion is nullified.

Tlius, conect judgments as to prices andprice structures constitute a major contri-bution of management to prtxiuctivity indistribution. In many cases, ibe most eftec-tive price is the one that produces thegreatest volume of sales. At Ihis price, thecompany has the greatest revenue availableto meet all claims on earnings, includingworkers, suppliers, and owners.

Promotion is directed toward expandingthe market for a product. It operatesthrough ihe transmission of intbnnationand argument to those who may buy aproduct̂ —either as ultimate consumers oras intermediaries. Promotion becomesmore necessary as products become morenumerous and ways ot" living and workingbecome more complex. Many productsscarcely could be pnxluced and distributedat all without constant promotion, becauseconsumers musi be slimulated to wantthem and be taught how to use them.

Thus, tbe distribution system that startsout to offer simple services to the con-sumer ends by engaging in educationalcampaigns to persuade the consumer touse specitic products and services. Theconcept of productivity in distributionmust be broad enough lo cover this func-tion of modifying or stimulating consumerwants as well as the function of servingexisting wants.

The contribution of labor in distributiondepends only to a minor degree on physicaleffon or manual .skills. The girl in thewrapping department may exhibit moredexterity and yet be less prtxiuctive tbanthe salesman on the floor. Knowledge ofproducts is required almost universally,varying in degree from the rudimentaryknowledge of the stock clerk to the stylesense and judgment of current market val-ues on the part of the expert buyer.

Many distribulion workers are in con-tact witb customers. Qualities of enthusi-asm, initiative, and adaptability are neededfor effective contact work. The prtxluctivi-ty of distribution workers may. therefore.

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depend to a large extent on psychologicalfactors sucb as loyalty toward the employ-er. A factory worker might pertbrm hiswork effectively despite a hostile feelingtoward the boss. But marked feelings ofhostility would almost certainly diminishthe effectiveness of a distribution worker.Many distribulion workers are called uponto influence third parties, namely cus-tomers, in the interest of their employers.Mental attitudes are vitally important toproductivity in such endeavors.

How then can an index of productivitybe used in wage negotiation? It can beused simply as one essential datum alongwith several others that both sides shouldtake into account. Despite tbe strictures 1stated earlier, the cost-of-living index hassome proper bearing on wage negotiation.If it's true that tbe trend in wages mustoutrun increases in the cost of living, theindex would at least provide the basis fordefining minimum adjustments. That is.whenever the wage trend fails below thecost-of-living trend, it may present a casefor an adjustment at least sufficient toremedy this discrepancy.

in the same way. a productivity indexmay be a convenient point of reference innegotiation, even though it cannot be usedalone to decide tbe issue. It may shed lighton ability to pay. because increased wagepayments in any enterprise or industrymust presumably come mainly out ofincreased productivity.

But. although indexes of productivityand of the cost of living may both be usefulguideposts. the true target of negotiationlies in another direction: to approximatewith the minimum error the equilibriumprice tbr labor at the given time and place.Tlie most objective yardstick, therefore,might be the forecast of the long-run trendin wages with tbe indexes mentioned beingemployed to detlne the limits of tolerancearound this trend line.

An accurate determination of the equi-librium price for labor will require a com-prehensive view of the competitive forcesin the labor market. From one viewpoint,business concerns demand labor as itdemands raw materials or equipment andcompete for its share of the available laborsupply. If tbe labor market was freely com-petitive in that sense, wages in each areano doubt would be determined by marginalproductivity of labor in relation to the otherfactors of production.

A contrary and equally valid viewpointwould conceive of workers as demandingjobs rather than industry demanding labor.

Big business, small business, government,and the professions all lumped together arethen .seen as the institutional frameworkwithin which the competition betweenindividuals takes place. Competition iskeener for some types of positions that forothers. Relatively, more people apply foreach position on the managerial side thanon the labor side.

This conception of competition amongindi\ iduals for ways of receiving incomemay be broadened to include persons whohope to draw income from savings orinhentance rather than from employment.Some of these individuals are widows,orphans, and persons with leisure-classideals who are not easily drawn into thelabor market. The progressive decrease inbond yields and other interest rates tends toresult in a constantly decreasing share oftbe national income available to this groupas compiired to those who participate inmanagement and labor.

The net effect of ttiis two-phase compe-tition in the labor market is a generallyupwiu'd trend in tbe share of nationalincome going to labor. In fact, the trend ofwage increases may often outrun increasesin lalxjr productivity. The function of col-lective bargaining is to bring about theseadjustments with tbe least possible disrup-tion of economic processes. To the extentthat negotiation succeeds in establishingthe equilibrium price for labor with a mini-mum of error, it will minimize monopolygains or temporary bargaining gains foreither management or labor.

Distribution Levels

Finally, a word is in order withrespect to the problem of measuringseparately tbe trend in productivity

at the various levels of distribution, suchas retailing, wholesaling, and manufactur-ers' sales. One proposed method measuresthe productivity of the entire distributionsystem by assuming that the output of dis-tribution is the volume of services deliv-ered to the ultimate consumer throughretailers, in conformity with this generalapproach, other tenninal points might beselected to measure the trend in servicesdelivered at such points.

The most obvious extension of the gen-era! method would be to take the point ofpurchase by the nation's retailers as thenext most inifxirtant tenninal pt)int. For tbenumtjer of unit retail sales, substitute thenumber of unit retail purchases. Generally,each unit purcha.se is represented by a lineon the wholesaler's invoice to the retailer.

It is somewhat more difliculi to workout the parallel between consumer shop-ping hours and the cost to the retailer ofusing wholesale distribution services.Tbe cost to tbe retailer of buying goodsis only the beginning. A number ol" dis-tribution functions can be shifted ingreater or less degree from the wholesaleto the retail level.

These costs include storage and otherexpenses of carrying excess inventory, itwould also include the cost of anyadvertising other than retail advertising,which could be done cither by the retail-er or his suppliers.

Without taking account ol the shiftingof functions, it would be impossible to getat the trend of productivity in wholesaledistribution. The retailer can shift cost.s tothe consumer in ways that show up in anincreased number of shopping hours. Theopportunities for shifting costs trom thewholesaler to the retail level are more var-ied and even more signitlcant in reachingjudgments about relative efficiency.

Given a separate index of productivityin wholesale distribulion (defined toinclude distribution by manufacturers), itwould be possible to isolate the separatecontribution of retailing. This could bedone by comparing the index tor the wholedistribution system witb the index torwholesale distribution. They might even becombined to form a new index by puttingthe primiU7 index in the numerator and thewholesale index in the denominator.

Another possibility for exiending theusefulness of the indexes is to take certaintypes of retail stores as the terminal pointsand compute sepaiate indexes of produc-tivity for such fields as food distributionand drug distribution. This would involveidentifying the wholesale distribution ser-vices lying behind each type of retailing.These separate indexes by trades mightserve as a still more effective stimulus tothe general drive for greater efficiency indistribution.EHJ

CorrectionThe title ol" Howard Newman's

Marketing Law column in Vol. 1,No. 4 was incorrect. The titleshould read; "Warning .AbmilProduct Dangers." We regrci anyconfusion this may have caused.

—The Editors.

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