This emphasizes the connection between costs and service levels and aims to minimize the total distribution costs at a given service level, when backed by an integrated logistics network. Its four main components are:
- The total cost approach: this considers all the costs of the physical distribution network, visible and invisible, while trying to achieve a given service level. It is necessary to remember the interdependence of all these elements and to try to minimize the total costs instead of attempting to reduce them piecemeal.
- Trade-offs in costs: certain costs may increase while others are being reduced, but the objective should be to reduce the total distribution costs.
- Minimum sub optimization: owing to the interdependence of all the distribution functions, any change in one will affect the others. When these functions are integrated, the goal should be to minimize sub optimization through systems management.
- The total system perspective: this takes the concept a stage further by considering the costs in the entire marketing process from the beginning to the sale to the end-user, For example, instead of the retailer pricing the goods received, which is a time-consuming and therefore expensive process, the retailer can provide the manufacturer with up-to-date price lists, the manufacturer can price the products and charge the retailer for the service; the result being lower costs in total.
