Calculating Distribution Costs in a New Bakery Business

For a start-up bakery business, it’s going to be near on impossible to know the cost of delivering to customers you don’t have! The strategy from my how to price bread article has a tool for determining distribution costs for established businesses but if you’re new you are probably going to need a little more help.

If you plan to deliver your bread to your customers, calculating your supply costs correctly is an essential part of your business plan. There are thousands of businesses across the world that are supply based. If we are going to deliver bread to our customers we should treat this service with the respect it needs. Careful consideration in this core part of the business is going to be vitally important in the overall businesses success.

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What are the distribution costs in a bakery?

A distribution or supply cost in a bakery is the amount it costs to deliver the product from the bakery. We covered a shop based example and how to use this cost in the overall price of the bread in the how to price bread post.

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It doesn’t matter if you will deliver the bread yourself or you’re going to hire someone to do it, there will be a cost aligned to distribution.

Calculating distribution costs

If you are delivering bread to customers there are two core costs to consider, labour and vehicle expenses

1) Time or labour costs

The time it takes to deliver your products. On a short round that I had, it would take 2-3 hours a day – longer on a Saturday when there were markets or festivals to drop off.

Once we know how long it is going to take we can multiply this by the amount a driver is going to cost.

2) Vehicle expense

This includes the costs of fuel, maintenance and owning a car.

How to calculate supply costs for a new bakery

Unless you subcontract your deliveries, calculating the cost of distribution is not an exact science! What we need to know is:

  • A drivers wage
  • The length of time it will take to make deliveries
  • The distance driven
  • The mileage rate

Where to get your first figures

If I build my business plan around having 8 customers within 3 months in a 5 mile radius. As I specialise in supplying local businesses I’ll be expecting orders of between 5 and 15 loaves a day – so an average of 8. I won’t start off with this many customers which will make me less profitable but once I reach 8 I aim to be in the black.

Drivers wage

This can be found be researching local job boards such as indeed.

The time it will take the driver

It’s going to take 1:20 to make my journey in the morning. If I allow 5 minutes per customer to load and drop off this brings it up to 2 hours for my 8 customers.

The distance driven

Use a route planner to plot 8 potential clients in your area and measure the hypothetical route. In this case, my route will be 10 miles each day.

The mileage rate

Instead of costing every vehicle expenses, we can use a national mileage allowance (US). This provides a cost that’s reasonably close to what it is actually is. You should combine your costing with a cash-flow forecast to ensure your business will be profitable.

In the UK, the mileage rate is currently 45p, in the US it is 58c.

How much my distribution cost is going to be

If I was to estimate how long it was going to take to deliver, I would never get it right. There will be traffic, roadworks and occasional diversions for supplies which will slow me down. All we can do is get as close as we can.

For the driver’s cost.

Drivers rate @ £12 per hour
Time spent delivering: 2 hours
Driver cost: 12 * 2 = 24 

And to calculate the mileage expense.

Mileage expense: 45p per mile
Daily mileage: 10 miles
Mileage: 0.45 * 10 = 4.50

Adding them together.

24 + 4.5 = 28.5

Making a total daily delivery cost of £28.50

Divided by 8 drops:

28.5 / 8 = 3.56

The cost per delivery is £3.56.

For an average order of 8 loaves:

3.56 / 8 = 0.45

The cost of delivering a loaf is 45p.

So in this example, we should either charge £3.56 per delivery or include 45p in the sale price of each product.

The importance of costing for delivery

In the costing example, the for sale price of the bread was 76p of which 45p is the distribution cost.

It should be noted that the supply cost would increase dramatically if the average customer was only buying one or two loaves. In this case, it’s likely that the delivery cost will rise higher than the cost of making the product!

Taking into account your supply costs is a must for any bread delivery service!

Budgeting for your new business

For the cost of your products, I’m using the national mileage allowance. Separating the likely expenses into fixed costs will achieve an accurate figure but for costing using a mileage rate is satisfactory. When it comes to your bakery business plan a cash flow forecast will show separate expenses for the following:

Fuel

The total cost of fuel you expect to use in your business each month. This will include other journeys.

Maintenance

How much should you reserve from each month’s earnings to maintain your vehicle?

Vehicle cost

How much is the vehicle costs per month? If you paid for it outright, spread its value monthly over the next 3 years so your business will save up for the next one.

Tax & insurance

How much the vehicle insurance and tax will cost each month.

Miscellaneous costs

You may want to reserve some money for parking, speeding or traffic fines if it is likely that you will receive them. Toll roads should also be considered.

FAQ’s

If I deliver the bread myself do I need to charge for my time?

Yes! If you intend to work through the night and make the deliveries afterwards you still need to charge for your time.

It might work at first but as you pick up more customers and get bigger and big you’ll be working long hours just with the baking. You’ll want to be able to pay someone to take over your bakery round, and this cost should be factored in – even if it’s for a few days a week.