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Chapter 13
Physical Distribution
Introduction
· Physical distribution is the movement of materials from the producer to the consumer. This movement of materials is divided into two functions: Physical supply is the movement and storage of goods from suppliers to manufacturing. Physical distribution is the movement and storage of finished goods from the end of production to the customer. The particular path in which the goods move – through distribution centers, wholesalers, and retailers – is called the channel of distribution.
· A channel of distribution is one or more companies or individuals who participate in the flow of goods and/or services from the producer to the final user or consumer. The transaction channel is concerned with the transfer of ownership. Its function is to negotiate, sell, and contract. The distribution channel is concerned with the transfer or delivery of the goods or services.
· To extend markets requires a well-run distribution system. Distribution adds place value and time value by placing goods in markets where they are available to the consumer at the time the consumer wants them. The specific way in which materials move depends upon many factors, some of which are the channels of distribution that the firm is using, the types of markets served, the characteristics of the product, and the type of transportation available to move the material.
Physical Distribution System
· The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does so at least cost. To reach this objective, all activities involved in the movement and storage of goods must be organized into an integrated system.
· In a distribution system, six interrelated activities affect customer service and cost of providing it: Transportation, Distribution inventory, Warehouses (distribution centers), Materials handling, Protective packaging and Order processing and communication .
· The objective of distribution management is to provide the required level of customer service at the least total system cost. Management must treat the system as a whole and understand the relationships among the activities.
Interfaces
· The “marketing mix” is made up of product, promotion, price, and place, and the latter is created by physical distribution. Marketing is responsible for transferring ownership. Physical distribution is responsible for giving the customer possession of the goods and does so by operating distribution centers, transportation systems, inventories, and order processing systems. Physical distribution contributes to creating demand. Prompt delivery, product availability, and accurate order filling are important competitive tools in promoting a firm’s products. The distribution system is a cost, so its efficiency and effectiveness influence the company’s ability to price competitively. All of these affect company profits.
· Physical supply establishes the flow of material into the production process. The service level must usually be very high because the cost of interrupted production schedules caused by raw material shortage is usually enormous. Cost and availability or transportation for raw materials to the factory and the movement of finished goods to the marketplace are important factors in factory site selection. Unless a firm is delivering finished goods directly to a customer, demand on the factory is created by the distribution center orders and not directly by the final customer. This can have severe implications on the demand pattern and the efficiency at the factory.
Transportation
· The carriers of transportation can be divided into five basic modes: Rail, Road (including trucks, buses, and automobiles), Air, Water (including ocean going, inland, and coastal ships), and Pipeline. Each mode has different cost and service characteristics.
· To provide transportation service, any carrier, whatever mode, must have certain basic physical elements, ways, terminals, and vehicles. Ways are the paths over which the carrier operates. Terminals are places where carriers load and unload goods to and from vehicles and make connections between local pickup and delivery service and line-haul service. Vehicles of various types are used in all modes except pipelines. They serve as carrying and power units to move the goods over the ways.
· Carriers are legally classified as public (for hire) or private (not for hire). In the latter, individuals or firms own or lease their vehicles and use them to move their own goods. Public transport, on the other hand, is in the business of hauling for others for pay. All modes of transport have public and for-hire carriers. For-hire carriers are subject to economic regulation by federal, state, or municipal governments. Economic regulation has centered on three areas: regulation of rates, control of routes and service levels, and control of market entry and exit. Private carriers are not subject to economic regulation but, like public carriers, are regulated in such matters as public safety, license fees, and taxes. A for-hire carrier may carry goods for the public as a common carrier or under contract to a specified shipper as a contract carrier.
Transportation Cost Elements
· The four basic cost elements in transportation are line haul, pickup and delivery, terminal handling, and billing and collecting. The total cost of transportation consists of line-haul, pickup and delivery, terminal handling, and billing and collecting costs. To reduce shipping costs, decrease line-haul costs by increasing the weight shipped, decrease pickup and delivery cost by reducing the number of pickups, decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments, and decrease billing and collecting costs by consolidating shipments.
· The fate charged by a carrier will also vary with the commodity shipped and will depend upon the value, density, perishability, and packaging .
Warehousing
· The service functions warehouses perform can be classified into two kinds: (1) The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. (2) The distribution warehouse has a dynamic purpose of movement and mixing. The emphasis is on movement and handling rather than storage. The size of the warehouse is not so much its physical size as it is the throughput, or volume of traffic handled. Items should be warehoused only if there is an offsetting benefit gained from storing them.
· Warehouses serve three important roles: transportation consolidation, product mixing, and service.
· Any distribution system should try to provide the highest service level (the number of orders delivered in a specified time) at the lowest possible cost.
· The market boundary is the line between two or more supply sources where the laid-down cost is the same. Laid-down cost (LDC) is the delivered cost of a product to a particular geographic point.
Packaging
· The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The package must do the following: identify the product, contain and protect the product and contribute to physical distribution efficiency. There are usually at least three levels of packaging required in a distribution system, primary package, shipping container, and unit load.
· Unitization is the consolidation of several units into large units, called unit loads, so there is less handling. A unit load is a load made up of a number of items, or bulky material, arranged or constrained so the mass can be picked up or moved as a single unit too large for manual handling. The most common unit-load is the pallet. To get the highest cube utilization in the capacity of pallets, trucks or other vehicles, and warehouses, there should be some relationship between the dimensions of the product, the primary package, the shipping cartons, the pallet, the truck, and the warehouse space.