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2. Value-Weight Ratio

The dollar value of the product being moved and stored is important to storage costs since those costs are particularly sensitive to it. When product value is expressed as a ratio to weight, some obvious cost trade-offs emerge that are useful in planning the logistics system.

Products that have low value-weight ratios (e.g., coal, iron ore, bauxite, and sand) also have low storage costs but high movement costs as a percentage of their sales price. Inventory carrying costs are computed as a fraction of the product's value. Low product value means low storage cost, since inventory-carrying cost is the dominant factor in storage cost. Transport cost, on the other hand, are pegged to weight. When the value of the product is low, transport costs represent a high pro­portion of the sales price.

High value-weight ratio products (e.g., electronic equipment, jewelry, and musi­cal instruments) show the opposite pattern, with higher storage and lower transport costs. This results in a U-shaped total logistics cost curve. Hence, firms dealing with low value-weight ratio products frequently try to negotiate more favorable trans­portation rates (rates are generally lower for raw materials than for finished products of the same weight). If the product has a high value-weight ratio, minimizing the amount of inventory maintained is a typical reaction. Of course, some firms attempt to adjust an unfavorable value-weight ratio by changing accounting procedures to alter value or by changing packaging requirements to alter weight.

3. .Substitutability

When customers find little or no difference between a firm's product and those of competing suppliers, the products are said to be highly substitutable. That is, the customer is readily willing to take a second-choice brand when the first is not imme­diately available. Many food and drug products have a highly substitutable charac­teristic. As might be expected, suppliers spend great sums of money attempting to convince customers that such generic products as aspirin tablets and laundry soaps are not all alike. Distribution managers try to provide product availability at a level so that customers will not have to consider a substitute product.

In large part, the logistician has no control over a product's substitutability, yet he or she must plan for the distribution of products with varying degrees of substi­tutability. Substitutability can be viewed in terms of lost sales to the supplier. Higher substitutability usually means a greater chance for a customer to select a competing product, thus resulting in a lost sale for the supplier. The logistician generally deals with lost sales through transportation choices, storage choices, or both.

For a given average inventory level, a supplier can increase the speed and dependability of product deliveries and lower the incidence of loss and damage. The product becomes more readily available to the customer, and fewer product substitutions by the customer are likely to occur. Of course, the higher cost of pre­mium transportation is in trade-off with the cost of lost sales

In either case, the logistician is in a prime position to control the impact of prod­uct substitutability on the firm's profits.